Mutual funds abuse our funds

Fund deposit security

Economic and legal aspects

The Investment security Always deserves a close look. After all, investments for private investors are almost always linked to personal life planning. Therefore, the security of an investment is not only a very important aspect in times of economic crisis. Basically are Fund deposits secured in several ways. We present the individual security mechanisms that work with funds here.

Security through diversification

Particularly in comparison to investments in individual securities, funds spread the risk of loss due to their structural nature. The distribution of money over many different securities, i.e. the Diversification of investments, reduces the risk of loss and thus increases security. Since not all of the capital is invested in a single company, for example, the fund investor will cope with the loss of a value in his fund portfolio better than the investor who has invested a large part of his money in a losing business.

In addition to the existing legal provisions and requirements of the Federal Financial Supervisory Authority (BaFin), which protect against misuse of financial products, there are several security aspects to consider when selecting funds. Because the different types and forms of funds also contain different risk and security weightings.

Basic security: Funds are special assets

The German Investment Act (InvG) contains important provisions for the protection of the fund's assets and thus the fund units of investors. One of the most important requirements: The deposits of the fund investors are called Special fund managed separately from the assets of the fund company. Fund companies must deposit the capital with independent custodian banks. This Security mechanism prevents the fixed assets from being counted as part of the bankruptcy estate in the event of bankruptcy. This means that in the event of a failure, investors first have access to their fund capital.

It is important to note the difference to losses that result from fluctuations in the price of the securities acquired by the fund. The investor bears the risk of fluctuating prices and, in the event of success, is rewarded with a correspondingly higher return. Good fund management can take both opportunities and risks through Portfolio adjustments to the market situation adapt.

Due to the larger volume of an investment fund compared to the individually managed securities account, there is greater scope for design. However, this only applies to actively managed funds. Passive funds or index funds (e.g. ETF) map the development of the stock or bond market; Interventions by the fund management are not intended for such financial products.

Index funds also contain other risks: Index funds and index can develop differently, this effect is called "tracking error". The swap transactions contained in index-oriented funds also contain the risk of the partner defaulting, the “counterparty risk”. In these swap transactions, the protection of the fund units as special assets does not apply, which has a negative impact on security compared to actively managed investment funds.

Protecting Investors

Risk diversification, information requirements, custodian bank

The investment law also contains the principles for Risk diversification of the fund assets and Information obligations of the fund company anchored. In detail, this means: Fund managers may invest a maximum of 10 percent of the fund's assets in the securities of a company. The law also stipulates that the fund's assets should be spread across many different investments; this diversification increases security. In addition, the fund company has extensive information obligations vis-à-vis investors. Anyone who offers a fund in Germany must prepare a sales prospectus. The prospectus contains the economic and legal details of the fund. This also includes, for example, information on whether the fund is actively managed or whether it tracks an index. In this case, the index must also be mentioned in the documents relating to the fund.

Fund companies are also considered special credit institutions and must therefore meet the same requirements as a commercial bank; Even as special credit institutions, the fund companies are subject to the supervision of the Federal Financial Supervisory Authority (BaFin), which brings additional security for the investor. Before a fund can even be offered on the regular German market, BaFin checks every new product.

So that the implementation of the separation of the fund assets from the assets of the investment company is guaranteed, the Investor money as a special fund managed by an independent custodian bank in a specially set up blocked account or blocked deposit. The tasks of such a custodian bank include making distributions, issuing and redeeming unit certificates and also determining the prices for issue and redemption. The custodian banks are also under the supervision of the Federal Financial Supervisory Authority. In this separation, the fund company only acts as a trustee and has no access to the fund investors' capital.

Security-oriented variant

Fund with capital guarantee

The topic of security is always relevant for investors, whether in crises or in supposedly stable times. Some savers shy away from the risk of losing capital due to falling stock prices. In order to protect yourself against this, too Fund with capital guarantee offered. These funds advertise that as a result they will receive at least the capital employed. Such guarantee funds give a guarantee of the capital preservation of the deposits made, usually between 80 and 100 percent of the invested money. With a view to the “magical investment triangle”, however, every investor should be aware that such a guarantee cannot be obtained without sacrificing returns or flexibility. The guarantee costs fees and ultimately reduces the return. A well-managed equity fund can therefore generate better returns in the long term. In addition, there is flexibility: the guarantee relates to the end of the term. If the investor wants to sell his fund securities beforehand, a lower price can result in the event of early sale; the guarantee does not then apply.

Another form of guarantee fund are capital preservation funds. Such funds guarantee a certain level of performance and secure lasting profits if they are successful. The complexity of the investment strategies and the higher costs of managing the fund reduce the potential for returns in the long term. Again, the investor has to respect his interests Security, return and availability of the investment weigh up.

Special tax position

Foreign funds

Differences between approved German investment fund and foreign funds consist mainly in legal and tax aspects. Foreign funds can be registered funds that may be offered to the public in Germany. These foreign, registered funds are equivalent to German funds for tax purposes. In addition, there are correspondingly non-registered foreign funds that are represented by financial representatives and are not allowed to be offered to the public. In addition, there are all other non-registered foreign funds. The last two forms mentioned, i.e. all non-registered funds, do not meet the criteria of the Investment Act and the requirements of the Federal Financial Supervisory Authority and are therefore much worse off from a tax point of view than approved funds.

The right fund for everyone

Funds are firmly established in the financial market. Equity funds have been available to investors in Germany since the early 1950s. Today the funds available in Germany manage around a fifth of the annual economic output. Which investment and which combination is right for you depends on your goals and the phase of life in which you are. Funds can be an important Building block for your personal wealth creation because for every investment objective there is a suitably aligned fund that investors can buy.

Basically, mutual funds cater to investors security in two ways: On the one hand, the invested capital is protected from the insolvency of the fund company. The fund's securities are deposited as special assets at a special bank. Even if the fund provider or the custodian bank goes bankrupt, the investors are entitled to the securities. On the other hand, it is generally advisable for every investor to divide his capital into different types of investment, the development of which depends as little as possible on one another. A major advantage for the security of fund investments is that this principle of diversification is one of the basic requirements of an actively managed investment fund approved in Germany.