Of all available and stable financial instruments present in the Russian market, the most popular are mutual funds, which allow each investor to receive income from investing in certain assets. What are the specifics of these financial instruments and what advantages do unit investment funds have?
in today’s article.
According to the Central Bank of the Russian Federation, the number of clients on trust management of professional securities market participants – non-credit financial organizations (NFE), for the last year 2017 amounted to 74.5 thousand, having increased by 107%. This is 99.4% and all of them are individuals.
The total value of their investment portfolios reached RUB 1.29 trillion, while the average volume of the client’s portfolio amounted to RUB 17.4 million. The growth driver of the segment, among other factors, was the decline in interest on deposits, which pushed citizens to search for new instruments with higher returns, including the purchase of securities – UIFs through management companies. This trend was also reflected in the dynamics of individual investment accounts (IIA). Thus, at the end of 2017, the number of individual investment accounts (IIA) exceeded 300 thousand units, and their growth during the year was 61.3%. At the same time, the volume of assets in the IIA increased by almost 150% and by the end of the year reached 51.2 billion rubles.
Units of investment funds have long been used as an investment instrument. It is important to know that you, as an investor, have the opportunity to purchase units of an investment unit trust to generate stable income with the lowest degree of risk, as opposed to buying this or that security. There is a huge number of them in the market and each of them implements a specific trading strategy determined by the investment declaration. So what is a unit investment trust?
What is a unit investment trust?
A unit investment trust is a separate property complex consisting of property transferred to the trust management company by the founder of the trust management, provided that this property is combined with the property of other founders. From the property received in the process of such management – the share in the ownership right, which is certified by a security issued by the management company. At the same time, it should be remembered that the owners of investment units still bear the risk of losses associated with changes in the market value of the property included in the unit investment trust.
Transactions with the property of a unit investment trust are performed by the management company on the basis of a trust management agreement.
Accession to such an agreement is effected through acquisition of UIF investment units, issued by the management company.
Investment unit is a registered security, which confirms its owner’s share in the ownership right to the property constituting the unit investment trust and gives the right to demand from the management company proper trust management of the unit investment trust, as well as the right to receive monetary compensation upon termination of the trust management agreement.
Types of unit investment funds and their differences
According to the legislation of the Russian Federation, mutual funds can be open, interval and closed.
An open UIF – enables its holder to demand from the management company the redemption of the investment unit and payment of monetary compensation in this connection, commensurate with the holder’s share in the common ownership rights in any business day.
Interval UIF – allows redemption of a unit at least once a year, during a predetermined period of UIF management.
Closed UIF – the owner of a closed unit investment trust has the right, besides receiving income, to participate in the general meeting of investment unit holders.
Each investment unit certifies the same share of property in the UIF on the basis of common ownership rights.
and gives common rights to all UIF owners.
It is clear that after the fund’s assets are formed, the management company starts trying to earn money in the market. In order to perform operations related to the trust management of a unit investment fund, a separate bank account is opened. Separate custody accounts are opened to account for the rights to securities constituting a unit investment trust. Such accounts are opened in the name of the management company of a unit investment fund, specifying its name and that the company acts as a trustee. The names of investment unit holders are not specified in this case.
In case of causing losses as a result of violation of the Federal Laws, rules of UIF trust management, including incorrect determination of the amount issued to the investment unit – the management company is liable to the owners in the amount of the real damage and the amount of monetary compensation to be paid in connection with the redemption of the investment unit.
There are over twenty such mandatory rules.
Advantages of unit investment funds
Investments in mutual funds give a number of important guarantees and advantages to a private investor.
Buying an investment unit, you buy not one security with its own risks, but a diversified portfolio that combines an optimal ratio of risk and return. And this portfolio can be purchased for a small amount. For example, the minimum investment amount can be from 1,000 rubles. There are different categories of shareholders in mutual funds: both small and large, and all of them, regardless of the amount of investment, have the same rights. In addition, you can sell shares of open-end unit investment funds on any working day.
Regulation of the Central Bank
The establishment and operation of mutual funds and management companies is strictly regulated by the Bank of Russia in the financial markets. The regulator licenses the activities of companies servicing the operation of mutual funds, registers the Rules of the Unit Investment Fund Management Board and supervises the management company. Since mutual funds are subject to legislative regulation aimed at protecting the interests of small investors, investors can be assured to a great extent that the management company will properly manage their funds and protect them.
Professional managers and analysts, having considerable experience in the securities market, modern market infrastructure and knowledge of the financial state of various industries and individual enterprises, assume all the work and responsibility for the management of UIF assets in the interests of the investor. Receiving appropriate remuneration for their work.
But before you start investing in mutual funds, I would advise you to familiarize yourself with the ratings of mutual funds and management companies, and the information about them is now available.