Risk Disclosure
An open-ended investment fund is a type of capital investment associated with risks. The general principle applies that risks increase alongside opportunities, i.e. the greater the return potential of an investment fund, the higher the risks of incurring losses with the investment.
Important Notice
The content provided on this website and in our educational offerings explicitly does not constitute investment advice or investment recommendations, according to Art. 20 Market Abuse Regulation (EU) No. 596/2014 (MAR).
This is general information for educational purposes. All decisions you make based on this information are your sole responsibility.
Information Purpose
The content offered serves exclusively informational, educational, and entertainment purposes. If names, numbers, data, or similar information about investment products are mentioned, these serve only as illustrative examples.
In no case are buy or sell recommendations or other instructions for action given, in particular no recommendations to hold investment products.
Open-Ended Investment Funds
General Information
Investment funds are vehicles for collective asset investment under the regulations of the German Capital Investment Code. A distinction is made between open-ended investment funds, which are open to an unlimited number of investors, and closed-ended investment funds, which are open to a limited number of investors.
A capital management company determines the investment strategy of an open-ended investment fund and professionally manages the fund assets. The fund assets are strictly separated from the assets of the capital management company as special assets for investor protection reasons. For this reason, the assets belonging to the investment fund are held at the so-called depositary.
The fund assets can consist of various asset types depending on the type of investment fund (e.g. securities, money market instruments, bank deposits, investment shares, and derivatives).
Investors can acquire a co-entitlement to the fund assets at any time by purchasing investment unit certificates through a credit institution or the capital management company. However, the capital management company may temporarily restrict, suspend, or permanently discontinue the issuance of fund units under certain circumstances.
The liquidation of investment units can take place in two ways. On the one hand, there is generally the option of returning the investment unit certificates to the capital management company at the official redemption price. On the other hand, the investment unit certificates may be traded on a stock exchange. Third-party costs may arise in both the acquisition and liquidation of investment unit certificates (e.g. front-end load, redemption fee, commission).
The value of a single investment unit certificate is calculated by dividing the value of the fund assets by the number of issued investment unit certificates. The value of the fund assets is usually determined using a prescribed valuation method. For exchange-traded investment funds, continuous exchange trading is also available for price discovery.
The key investor information, the sales prospectus, and the investment conditions provide information about the investment strategy, ongoing costs (management fee, operating costs, depositary costs, etc.) and other essential information about the open-ended investment fund. Additionally, the semi-annual and annual reports to be published are an important source of information.
Foreign capital management companies may be legally structured differently than their German counterparts. However, if these foreign capital management companies distribute open-ended investment funds in Germany, they must meet certain legal requirements and are subject to supervision by German regulatory authorities.
Differentiation Criteria of Open-Ended Investment Funds
The different types of open-ended investment funds can be differentiated according to the following criteria:
- Composition:
- The fund assets can consist of various asset classes (e.g. equities, interest-bearing securities, commodities).
- Geographical Focus:
- Open-ended investment funds can either focus on specific countries or regions or invest globally.
- Investment Horizon:
- Open-ended investment funds can have a fixed or unlimited term.
- Income Use:
- Open-ended investment funds can distribute income regularly or reinvest it to increase the fund assets (accumulate).
- Currency:
- The prices of investment unit certificates of open-ended investment funds can be offered in euros or a foreign currency.
- Hedging:
- The capital management company or a third party may guarantee a certain performance, certain distributions, or a certain value preservation.
Risks of Open-Ended Investment Funds
- Market Risk:
- Since the investment assets are invested in financial instruments, the value of your investment fund units is significantly influenced by economic developments and capital market developments. Even broad diversification of investment assets cannot prevent adverse market developments from leading to a decline in value and thus to asset losses.
- Volatility:
- Units in open-ended investment funds can normally be redeemed on each stock exchange trading day at the applicable unit value. The unit value is subject to fluctuations. The strength and frequency of these fluctuations is called volatility and is calculated using various historical indicators. Particularly with a short-term investment horizon, high volatility poses an increased risk of loss, as value losses can no longer be "waited out". Investment funds with a high equity component are generally more volatile than investment funds with a high bond component.
- Risk Concentration:
- The opportunities and correspondingly the risks of an investment fund increase with increasing specialization in certain investment focuses (e.g. regions, sectors, or currencies), as this weakens the diversification effect.
- Derivative Risks:
- Investment funds can invest in derivatives (e.g. options, financial futures, swaps). The use of derivatives can involve risks that go beyond the risks of other financial instruments.
- Suspension Risk:
- The terms of the investment fund may provide that the fund company can suspend the redemption of fund units for up to two and a half years in certain exceptional situations. During the suspension period, fund units cannot therefore be returned; if sold on the stock exchange, if at all possible, significant discounts to the actual unit value must be factored in. Furthermore, the suspension may even lead to liquidation of the fund assets, which is generally associated with asset losses for the investor.
- Tax Risks:
- Income earned from investment funds is subject to income tax for the investor. Changes in the tax framework for capital gains can lead to a change in the tax burden.
Special Risks of Exchange Traded Funds
Exchange Traded Funds (ETFs) are exchange-traded open-ended investment funds that replicate the performance of an index – such as the DAX. They are also known as passive index funds.
In contrast to active investment strategies that aim to achieve excess returns (outperformance) compared to a benchmark index through the selection of individual securities (stock picking) and determination of favorable entry and exit points (market timing), a passive investment strategy aims not to outperform a benchmark index, but to replicate it at the lowest possible cost.
- Price Risk:
- Since ETFs passively replicate an underlying index and are not actively managed, they generally carry the base risks of the underlying indices. ETFs thus fluctuate directly proportional to their base value. The risk-return profile of ETFs and their underlying indices are therefore very similar. If the DAX falls by 10%, for example, the price of an ETF tracking the DAX will also fall by around 10%.
- Risk Concentration:
- The investment risk increases with increasing specialization of an ETF on a certain region, sector, or currency. However, this increased risk can also bring increased earning opportunities.
- Replication Risk:
- ETFs are also subject to replication risk, i.e. there may be deviations between the value of the index and the ETF (tracking error). This tracking error can exceed the difference in performance caused by ETF fees. Such a deviation can be caused, for example, by cash holdings, rebalancing, capital measures, dividend payments, or the tax treatment of dividends.
- Counterparty Risk:
- In addition, there is a counterparty risk with synthetically replicating ETFs. Should a swap counterparty fail to meet its payment obligations, the investor may incur losses.
- Risk of Transfer or Termination of Special Assets:
- Under certain conditions, both the transfer of the special assets to another special fund and the termination of management by the capital management company are possible. In the case of transfer, continued management may take place under worse conditions. In the case of termination, there is a risk of (future) lost profits.
- Off-Exchange Trading:
- When ETFs and their underlying components are traded on different exchanges with different trading hours, there is a risk that transactions in these ETFs are carried out outside the trading hours of the respective components. This can lead to a deviation in performance compared to the underlying index.
- Securities Lending:
- An investment fund may enter into securities lending transactions to optimize returns. If a borrower cannot meet its obligation to return the securities and the collateral provided has lost value, the investment fund faces losses.
No Guarantee of Success
We give no guarantee that financial goals will be achieved. Past performance is not a reliable indicator of future results.
The strategies and methods taught in our educational offerings have worked in the past, but this does not mean they will work in the future.
Disclaimer of Liability
All information provided is provided to the best of our knowledge and belief. However, it is not excluded that it may prove to be incomplete, incorrect, or outdated.
We assume no liability for investment and purchasing decisions made based on our content. Every investment is made at your own risk.
Personal Responsibility
Before making investment decisions, you should:
- Inform yourself comprehensively about the respective products and their risks
- Analyze your personal financial situation carefully
- Only invest money whose loss you can afford
- Consult a qualified and independent financial advisor if necessary
Tax Information
The tax treatment of capital gains depends on the personal circumstances of each investor and may be subject to future changes. We recommend consulting a tax advisor for tax-related questions.
Questions?
If you have questions about these risk disclosures or our offerings, please contact us: kontakt@monvesta.de