When it comes to putting your money in an investment fund, it's important to understand the different types of funds that exist and the investor profiles they are suitable for. There are numerous investment funds and numerous ways to classify them. However, the most common category, and the one you are most likely to come across, is the category that classifies funds according to the type of asset in which they invest. These are as follows:
Fixed income funds
These funds invest in fixed income instruments like promissory notes, bonds, treasury bills, etc. The value of these funds and their performance are directly related to changes in interest rates. For the risk to be lower, they must be short-term fixed income funds, but the return will also be lower.
This type of fund is particularly suitable for investors with a conservative profile who are willing to assume a lower return for a lower risk.
Money market funds
This investment fund category seeks to maintain the available capital while achieving a return based on short-term interest rates. As their name suggests, these funds are made up of money market assets, mainly cash and short-term credits.
Money market funds are very safe and stable but not very profitable. They are designed for investors who want to accumulate their savings while waiting for the right time to use them.
These funds are mainly made up of stocks. They are divided into different categories according to characteristics like the markets in which they invest or the sectors of activity. These investment funds yield a higher return than fixed income funds but the risk is also higher. Equity funds are recommended for investors with a more audacious profile who are willing to assume a higher risk in exchange for a higher return.
These funds invest in a combination of fixed income and equity instruments. The level of risk will depend on the percentage of each type of instrument, so it's important to know the proportions. If the fund is made up of a higher percentage of fixed income, the risk will be lower and so will the return. Conversely, if the fund is made up of a higher percentage of equities, the risk will be higher and so will the expected return. Mixed funds are suitable for all types of profiles, depending on the percentage you want to invest in fixed income and equities.
The main characteristic of these funds is that you can recover your investment up to a certain date and, in some cases, get an additional return. Guaranteed funds include fixed-income funds (which guarantee the initial capital invested plus a fixed return at the maturity date) and equity funds (which guarantee the initial capital invested plus a return based on the performance of the assets in the fund). In the case of guaranteed equity funds, if the markets in which they invest don't perform as expected, you will not get any additional return. These funds are designed for investors with a conservative profile who are willing to leave their money in the fund for a long time.
Free or alternative management funds
This type of fund gives the fund manager the freedom to use a variety of methods to obtain the highest possible return. Also known as hedge funds, alternative management funds seek to obtain a positive return regardless of market conditions.
The risk with this type of fund is situated halfway between fixed income and equity funds.
This funds in this category are differentiated by criteria or characteristics such as the currency in which they operate, the geographical area, the business sector of the companies in which they invest, or the social responsibility criteria of the companies selected for investment. But over and above these concepts and characteristics, the most important criterion – the one that should guide your choice fund – is the return you hope to obtain and the risk you are willing to assume. In other words, start by choosing between a conservative, dynamic or aggressive investment fund.