The first things that come to mind when we think about a savings plan are deposits and investment funds, to get better returns on our money. But these are two very different financial products, with different outcomes for our money. Our choice of one product over another should be determined by our investment strategy and the economic environment at the time.
Let's quickly remind ourselves of the advantages of investment funds and deposits, so we have a better understanding of the differences.
Main advantages of investment funds
- Professional management: investment funds are usually managed by professionals with extensive experience in the markets, financial products and investing, providing value and security when we opt for such products.
- Flexibility: you can invest in a fund at any time, subject to some investment limits.
- Longer profitability horizon: with interest rates at historical lows, funds have a clear advantage over deposits at present: expectations of higher returns compared to deposits.
- Transfers: we can transfer our investment from one fund to another to reflect our interests with no tax obligations.
- Tax: the returns on funds are taxed as capital gains, i.e. they are taxed progressively based on the return obtained.
- Diversification: diversifying means converting or transforming something that is uniform or unique into something that is multiple and varied. If we apply this term to investment funds, it means planning your investment strategy and allocating funds to different destinations so that you have more options and variables to reduce your risk, as equity instruments do not all behave in the same way at the same time. This means that you can always respond to the investment environment and economic conditions.
- Liquidity: investment funds are assets that can be quickly turned into cash, usually in around three days, although this depends on each fund. Transparency: fund prices are published daily and the management and depositary entities must comply with the CNMV's legal framework.
Advantages of deposits
- Direct arrangement: arranging deposits is very simple. You do not need an intermediary or manager, or any great knowledge of banking, investment or finance.
- This is a very easy investment option: every bank offers this service and it is easy to arrange: you just have to choose the currency, term and amount.
- Transparency: you know the term, returns and liquidity of your investment at all times.
However, as we have mentioned, market conditions are one of the most important factors in choosing investment products. The returns on deposits are currently very limited. Their tax treatment may be less attractive than that of investment funds and they are less liquid.