Investment companies today offer their clients a rich selection of assets to invest their funds. Many traders themselves think about how to effectively diversify their investment portfolio. Therefore, speaking of the Russian securities market, it is impossible to ignore such types of investments as investments in mutual investment funds (mutual funds), non-state pension funds (NPF) and general funds of banking management (OFBU). It is these collective forms of asset management that are most common among investors today. The listed funds serve mainly for the accumulation and enhancement of investor funds. Investors who for various reasons do not have the opportunity to invest their own savings or temporarily free funds on their own can invest them in funds. Interest in the collective form of investment in recent years has increased significantly in our country. With this form of investment, diversification of investments in various instruments increases, which entails a reduction in risks, which is very good for investors.
The collective form of investment is the pooling of funds (assets) of individual investors (individuals and / or legal entities) in order to increase their value and generate income.
How else does collective investment differ, say, from a bank deposit, which also brings together depositors’ money and can acquire securities? And the fact that the owner of a bank deposit has the right to demand a deposit back, moreover, with interest, regardless of the results of investing the depositors’ money by the bank, if, of course, nothing happens to the bank. The bank assumes the risk that its investments may not bring the income necessary to fulfill its obligations, therefore, most often it invests assets in low-risk investment objects. Most often this leads to the fact that interest rates on deposits are low. In this situation, the risk of not receiving the desired profit is the risk of the investors themselves, as well as the profits with the favorable development of events will be received by the investors themselves, they will not have to share it with the bank.
The need for collective investment arises also because traditional financial instruments are inaccessible to small investors because of the high price, the difficulty of working with them, or the reluctance of issuers and intermediaries to mess around with small transactions. It can be said that market infrastructure participants are simply uncomfortable working with small investors.
Mutual investment funds (mutual funds)
The most famous and most sought-after tool for collective investment among private investors today are mutual investment funds.
Investment activities of mutual funds are regulated by the Federal Law of November 29, 2001 No. 156-ФЗ “On Investment Funds” (hereinafter – the Law on Investment Funds) and a number of regulatory acts defining the infrastructure and peculiarities of work on the stock market. It should be noted that in recent years there have been significant changes in legislation, especially with regard to mutual investment funds, non-state pension funds. Mutual funds can attract the savings of individuals and funds of legal entities, they are organized on the basis of trust management. Certify the ownership of the founders of the share of the mutual fund assets securities.
An important fact is that the current tax legislation creates favorable tax conditions for investors of funds. So, by virtue of its special legal form, mutual funds are exempt from paying taxes. Taxation arises from the investor only when selling investment shares. The management company is a tax agent, it withholds and transfers the tax on personal income.
Mutual investment funds are by definition a separate property complex without a legal entity, whose property management is carried out by management companies for the purpose of its growth in accordance with the investment declaration of a particular fund.
For the activities of mutual funds is carried out enhanced state control:
• Asset management is separated from their storage and accounting
• Multilateral control is exercised, including with the help of specialized depositories
• Requirements for accessibility and openness of information are constantly increasing
• Transparency is constantly increasing
The Investment Funds Act divides mutual funds into 3 types:
Open-end mutual fund
By investing in such a fund, the owner of the unit has the opportunity on any working day to present the investment company to the management company for redemption, that is, to demand their redemption by the management company at cost on the redemption day, thereby terminating the trust management agreement. The management company (MC) must comply with this requirement and transfer funds to the shareholder’s account within two weeks.
Interval mutual fund
When investing in a fund of this type, the owner has the right to demand the redemption of his investment shares, that is, their redemption by the management company only in certain time periods specified in the rules of trust management of the fund (the periods most often correspond to a quarter or half year).
Closed unit investment fund
By investing in such a fund, the owner must be prepared for the fact that he will not have the right and opportunity to end his relationship with the fund until the end of the term of the trust management agreement. Possible cases of termination of such contracts are indicated in the Law “On Investment Funds”. The maximum term of a trust management agreement for a mutual investment fund may not exceed 15 years.
The market for mutual investment funds has been very actively developing in the last two or three years, largely due to legislative regulation, increased investor confidence, growth in the welfare of the population and popularization of this tool as an important element of the investment strategy of a competent trader. The number of management companies and operating funds for this period increased several times, respectively, and the total value of the net assets of the funds increased, which grew more than 10 times. The value of the unit itself increases with the value of the fund’s net assets. The estimated value of one investment unit is equal to the ratio of the net asset value of the fund to the number of investment units of this fund.
About a sufficiently high security in this form of investment is the fact that the management, storage and control of the management company with the assets of the funds involved various independent companies whose activities are necessarily licensed: a specialized depositary, a registrar, an auditor and the management company itself.
Participants in the stock market have the following responsibilities:
• The management company professionally manages the funds of shareholders, investing them in assets permitted by law in accordance with the investment declaration of the fund
• The auditor checks the correctness of accounting and reporting of the management company, which investors have entrusted management of their funds
• The registrar keeps track of the rights of shareholders to the fund’s assets
• Specialized depository stores and, most importantly, controls all operations with the funds of the fund, that is, at any disposal of the management company must yazatelno be signed by an employee of the specialized depositary.
For their work and the work of these organizations, the management company receives a remuneration, which in total cannot exceed 10% of the value of assets, but the actual remuneration usually does not exceed 3% due to competition in this market segment. As a rule, management companies additionally receive a remuneration in the form of a premium when purchasing a share and a discount at redemption, which in practice does not exceed 1.5%. Part of this remuneration goes to pay for the services of management company agents, through which you can also purchase and redeem units without contacting the management company directly. Sometimes work in the stock market when purchasing mutual funds is more expensive for an investor than working through a broker.
Own expected costs are recommended to be calculated in each case. When choosing this form of investment, it should be borne in mind that the investor manages his assets only by buying and selling shares. And here you should determine for yourself the time intervals for which funds are invested, since this form of investment is focused on long-term investments (a year or more), even if we talk about the most common funds – open-ended mutual funds of shares of Russian issuers. This is due to the fact that management companies generally do not engage in short-term market speculation and do not try to “catch” fluctuations in stock prices.
Such operations in the market are hampered by large amounts of securities of each issuer in the manager’s portfolio, a specific set of selected issuers and the percentage of assets in the portfolio that need to be monitored so as not to go beyond the fund’s investment declaration.
Mutual funds, like portfolio investments, can be considered as an alternative to bank deposits. However, between them there are significant and fundamental differences, which were already mentioned at the beginning of the chapter. When working with shares in accordance with the law, the return on investment and investment income are not guaranteed, which, of course, adds a sense of riskiness to the investment. But this is only a feeling, since the risk is also present when working with banks and other organizations, only the risks to which the investor is taking, are somewhat different. No investment company will give you guarantees. This is the essence of investment as such – the risk is inevitable, but it can always be minimized. To be sure, you should collect and analyze information, get expert advice, and better a few – for comparison.
When deciding on the purchase of shares, you should pay attention to the following:
On the history of the Criminal Code, on the number of funds under its management, on the duration of the existence of these funds, on the yield, which was obtained in the calculation of at least a year.
The most careful thing is to make a decision when planning financial investments in little-known and “young” funds. If you want to invest in a stock fund, you should find out how the fund behaved in relation to the RTS index. If the growth of the fund outpaced the growth of the index or when the index fell, it fell more slowly, this indicates that the manager is doing a good job. Despite the fact that this is only an approximate guide, you should not leave them unattended. For example, when making decisions about investing in APFs that are under the control of a MC, investors usually focus on the UIF index of this MC.
Indeed, both mutual funds and pension funds are institutional investors, whose activities are similarly regulated by the state. Therefore, by observing the dynamics of unit value in mutual funds, with some stretch it is possible to predict and evaluate the management of a pension fund, while not forgetting to watch investment declarations. The value of a unit in a mutual fund is its index, so it is easy to judge by the change in the value of a unit of the profitability and riskiness of investments and the quality of management.
When comparing APFs and mutual funds, one should take into account that their investment horizons differ. From this it follows that the strategy and tactics of managing these funds must be different and the results and the timing of their achievement must be different. Investments in mutual funds are most often carried out to directly meet immediate needs, which is what distinguishes them from private pension funds, the structure of pension funds and the investment portfolio of mutual funds should also differ.
In addition, any mutual fund should take into account that when the situation in the market deteriorates, some investors sell their shares, for this reason, the MC is forced to keep part of the investment portfolio of the mutual fund in highly liquid and not too profitable assets. At the same time, the management efficiency decreases, and the reference score can also be underestimated.
Comparison with the index of mutual funds is often regarded as a simple and affordable way to assess the effectiveness of managing pension funds.
There are also non-state pension funds (NPF)
Having touched upon the topic of non-state pension funds (NPF), let us consider this group of participants in the securities market in more detail.
NPF – are non-profit organizations, their main task is social support of the population.
All income from the placement of pension reserves goes on their replenishment and in part (upon receipt of income) to pay for the work of the private pension fund itself.
The current state of NPF regulation in Russia is based on the principles consistent with the international “Basic Principles for the Regulation of Private Labor Pension Schemes”, which was formulated in the framework of the International Association of Pension Regulators and Supervisors (INPRS) established in April 2000 to promote development private pension systems; creating adequate regulatory and information exchange systems.
More than 130 pension regulators from different countries are its participants, the administrative support of the INPRS is provided by the OECD Secretariat. Everyone knows that in 2002 a pension reform was launched in Russia, which, of course, attracts interest in the collective investment market in general and non-state pension funds in particular. The essence of the reform: from a purely distributable state pension system to a mixed – distributive-funded system.
Mandatory pension insurance for old age and disability now consists of three parts: basic, insurance and funded. World experience shows that the financial interests of persons of retirement age are best ensured if, along with the state-controlled distribution system, the accumulative system in which pension contributions are used to invest in financial assets is developed in the pension insurance complex.
In the long run, the total amount of such assets should increase with the help of the gain obtained in the stock market.
Since 2002 — the year when the pension reform began — through our pension savings into the Pension Fund of the Russian Federation (PFR), we all learned the concept of investment and became a bit of an investor. And citizens under the age of 1967 may have even begun to think about an independent investment decision – who should be entrusted with their funded part of their pension. This choice was provided in 2003. They had to decide whether to leave money in the FIU, thereby entrusting them to a state management company, for conservative investment (as a rule, in low-yielding government securities) or to transfer them to private management companies. In 2004, for this category of future retirees, a third possible option appeared – transferring funds to non-state pension funds.
Now, along with voluntary retirement insurance provided by citizens themselves or their employers on the basis of agreements concluded with the APF, as it had been before for twelve years, pension funds were able to participate in compulsory pension insurance. They can work with pension savings, if future retirees voluntarily, on the basis of a statement, give them control of a part of their pension (savings part). The NPF will transfer pension reserves on the basis of a trust management agreement to the same MC, which by this time already manage their own mutual funds. Thus, this part of the pension savings in any case enters the stock market, regardless of whether it is decided to remain silent and leave them to the Pension Fund or transfer them to the NPF, only the results are likely to be different. Legislative restrictions are designed to reduce the risks from investing pension savings of citizens. In addition to this, and in contrast to working with mutual funds, the management company is obliged to guarantee the pension fund repayment and minimum profitability based on management results. Considering this form of collective investment in the framework of compulsory or voluntary pension provision as a way to generate additional income is not worth it. The NPF would rather save the deductions or savings from inflation invested in this way than earn a substantial income to the future retiree, and provide social support when the pension age comes. the management company is obliged to guarantee the pension fund repayment and minimum profitability as a result of management. Considering this form of collective investment in the framework of compulsory or voluntary pension provision as a way to generate additional income is not worth it. The NPF would rather save the deductions or savings from inflation invested in this way than earn a substantial income to the future retiree, and provide social support when the pension age comes. the management company is obliged to guarantee the pension fund repayment and minimum profitability as a result of management. Considering this form of collective investment in the framework of compulsory or voluntary pension provision as a way to generate additional income is not worth it. The NPF would rather save the deductions or savings from inflation invested in this way than earn a substantial income to the future retiree, and provide social support when the pension age comes.
In accordance with the Federal Law of July 24, 2002 No. 111-FZ “On Investing Funds to Finance the Funded Part of Labor Pension in the Russian Federation” contributions from the accumulative pension system can be invested:
• in local government and government
securities • bonds issued by other Russian issuers
• shares of listed Russian companies
• shares or units of index mutual funds placing funds in foreign bonds and investment category shares and mortgage securities of Russian issuers
• ruble-denominated bank accounts or deposits
• currency bank deposits
You can pay attention to the general funds of bank management (OFBU)
Today, many already have an idea about mutual investment funds and non-state pension funds, unlike the general funds of banking management (OFBU). We suggest you to consider the main characteristics that are peculiar to this form of collective investment.
In general, OFBU is very similar to mutual fund, but it has a number of fundamental distinctive features.
• First, the management of the fund belongs to the bank, and not to the private management company, which has a special license
• Secondly, when deciding to become a founder in any of the OFBU, the investor does not become the owner of the security – legislation neither on the securities market, nor on mutual investment funds. An investor certificate is issued to the investor. This can be called a nominal share, rather something of an indicator by which you can monitor the profitability of your investment. The equity certificate is not a property, unlike a share, it cannot be the subject of sales contracts or other transactions.
Mutual funds and APFs are subject to strict state regulation, while OFBUs are still regulated, in fact, by one instruction of the Central Bank of Russia of July 2, 1997 No. 63 “On the procedure for conducting trust management operations and accounting of these operations by credit organizations of the Russian Federation”. Trust management in OFBU has a high potential, but its position is less attractive than that of management companies, mutual funds and private pension funds, since the legal status of a OFBU is not sufficiently defined. The certificate of participation is a document that testifies to the fact that the property is transferred in trust, it also fixes the size of the share of the founder in the OFBU.
• Thirdly, thanks to the above, OFBU has more “free hands” when investing in various assets, their investment projects are limited mainly only to the declaration of the fund. For example, OFBUs have the opportunity to invest in futures and options, currency and securities of foreign issuers, precious metals, etc. – there are practically no restrictions, which adds mobility when making decisions during possible sudden market movements, may increase the profitability of the founders and additional risk.
So, having considered the three most well-known forms of collective investment, one can determine their main differences and similar points. Mutual funds, like pension funds, have similar legislation and a common regulator, that is, they are managed by the same management companies, but their activities differ in time horizons, social significance and tasks solved for investors.
Mutual funds and general funds of banking management have different regulators and are subject to different laws, build their work according to different principles of common property formation, but pursue the same goals from the point of view of investors, solve the same tasks and use similar mechanisms when they are achieved. When deciding on the placement of his funds, the investor should decide what goals he plans to achieve, what risks he is willing to take on himself, and choose the appropriate form of investing his savings to achieve them.