Two people holding a jar full of coins in which a plant is growing to represent the investment.

In an ever-changing financial world, investing in funds is an essential investment strategy for diversifying savings and maximising capital gains. Whether through mutual funds (FCP), undertakings for collective investment in transferable securities (UCI), or employee savings schemes, investment fund options offer a wide range of choices for investors wishing to optimise their assets. However, navigating this world requires a thorough understanding of the mechanisms, advantages, disadvantages and management costs associated with investing in funds.

This article offers a comprehensive guide to fund investing, providing a detailed analysis of the different strategies and expert advice to help you make the right choices. From understanding investment funds, through the advantages they offer and the criteria to consider when selecting the right fund, to the tax impact of these investments, you will be guided every step of the way. Our aim is to provide you with the tools you need to make informed decisions about investing in funds, whether you are building long-term savings or seeking to diversify your investment portfolio.

Understanding investment funds

Definition and general operation

Investment funds, also known as unit trusts, are financial vehicles that enable a group of investors to pool their capital to invest in various asset classes, such as equities, bonds or property. These funds are managed by fund management companies that allocate the capital raised according to a predefined investment strategyThe aim of the fund is to diversify investments and minimise risk for investors. Participants can buy units or shares in the fund, the value of which will fluctuate according to the performance of the underlying assets in which the fund has invested.

Difference between FCP, SICAV, FCPI and other types of funds

Undertakings for Collective Investment in Transferable Securities (UCITS) fall into two main categories: Sociétés d'Investissement à Capital Variable (SICAVs) and Fonds Communs de Placement (FCPs). The major difference between the two lies in their legal status. SICAVs are limited companies with a board of directors, issuing sharesFCPs are co-ownerships of transferable securities, issuing unincorporated units.

Type of backgroundLegal statusManagement
SICAVPublic limited companyBoard of Directors
FCPJoint ownership of securitiesManagement company

In addition, there are Fonds Communs de Placement dans l'Innovation (FCPI) and Fonds d'Investissement de Proximité (FIP), which aim to encourage investment in innovative or regional SMEs. These funds offer tax advantages in return for a commitment to hold the units for at least 5 years.

It is also important to mention Fonds Professionnels de Capital Investissement (FPCI) and Fonds d'Investissement Alternatif (FIA), which differ in their investment strategy and targets. FPCIs focus on unlisted companies with high risk but potentially high returnsFIAs invest according to an alternative policy, for example in property or commodities, and are intended for asset diversification.

Finally, Exchange Traded Funds (ETFs) deserve a special mention. They replicate the movements of a specific stock market index and are accessible on the stock exchange, offering greater liquidity than other types of investment fund.

Advantages of investment funds

Diversification and risk reduction

Investment funds provide a exceptional portfolio diversificationThis diversification strategy is crucial to minimising risk and maximising return, by investing in different areas that react differently to market fluctuations. This diversification strategy is crucial to minimising risk and maximising return, by investing in different areas that react differently to market fluctuations. In fact, diversification is a proven method for reduce risk and volatilityby averaging asset performance and thus smoothing portfolio returns.

Professional investment management

A significant advantage of investment funds is that they are able to professional capital management. The funds are managed by teams of financial experts with in-depth expertise in selecting and managing investments. These qualified professionals carry out in-depth market analyses and make informed investment decisions aimed at optimising returns for investors. The management company's active involvement in the governance of the companies invested in also contributes to value creation, accelerating the growth of the companies and generating capital gains when the holdings are sold.

Easier access to financial markets

Investment funds offer investors a easier access to a wide range of markets and asset classes, often beyond the reach of individual investors. This includes not only equity and bond markets, but also more specialised or geographically diversified asset classes. Pooling capital provides access to diversified investments on more advantageous terms, making investment in rare assets more accessible while diluting risk. The funds thus offer a gateway to global investment opportunities, with expertise and diversification that would be difficult to achieve individually.

Disadvantages to consider

Management fees and other costs

Investing in investment funds often involves incurring various charges that can reduce the overall return on the investment. Among these costs, management fees are particularly noteworthy, and are generally included in the investment fund's net asset value. between 0.5 % and 3 % per year for the most expensive funds. These fees are used to remunerate the management company for its expertise and the fund's operating costs. In addition, investors may also be subject to transaction fees, turnover fees and sometimes outperformance fees, which are additional costs that potentially reduce the profitability of the investment. Funds of funds, in particular, are subject to a double taxation of costsThis can have a negative impact on their performance.

Less control over investment choices

When investors choose to invest their capital in investment funds, they cede some control over investment decisions. Management companies make decisions about the composition of the fund's portfolio, which can sometimes lead to divergences between investors' objectives and the choices made by managers. This situation can lead to tensions, particularly at general meetings where strategic decisions are taken, as the interests of shareholders and founders may not always be aligned.

Recovery of funds and liquidity

The liquidity of an investment is an important criterion to consider, especially for investors who may need to recover their capital quickly. Some financial assets, particularly those listed on less liquid markets, may be difficult to sell without affecting their price. In addition, in open-ended investment funds, liquidity management can become complex if the underlying assets are less liquid or less liquid. in the event of a market downturn. This can lead to situations where the fund has to sell core assets at unfavourable prices to satisfy redemption requests, resulting in dilution for the remaining investors. This phenomenon is exacerbated during periods of financial stress, when a rush by investors to recover their capital can degrade the value of the remaining assets and increase the liquidity risk for the fund.

Fund selection criteria

Financial objectives and risk tolerance

When selecting an investment fund, it is crucial to clearly define your financial objectives, whether they are to generate regular income, increase existing capital or multiply investments. At the same time, measuring the amount of risk you are prepared to tolerate is essential, because some investments, although potentially more profitable, involve higher risks. It is therefore essential to align the fund's objectives with the investor's risk profile, taking into account their specific needs and expectations.

Performance history

Analysing a fund's past performance provides an understanding of the fund's ability to generate returns in different market conditions. It is advisable to compare the fund's performance history with that of similar funds, taking into account comparable strategies and objectives. This analysis helps to assess whether the fund has regularly meets or exceeds its benchmarks and provides an overview of its management in various economic scenarios.

Investment structure and strategy

The structure and investment strategy of a fund are decisive criteria for its selection. It is important to understand how the fund is managed and the main investment strategies employed by the fund managers. Constituent documents such as the prospectus or the Key Investor Information Document (KIID) should be reviewed to ensure that the the fund's strategy and objectives correspond to the investor's expectations. In addition, the presence of active or passive management can influence future returns and should be taken into account when selecting a fund.

Tax impact of investment funds

Tax benefits and exemptions

Investors who choose to invest their capital in investment funds, particularly Fonds Communs de Placement dans l'Innovation (FCPI) and Fonds d'Investissement de Proximité (FIP), can benefit from a range of significant tax advantages. For example, for cash payments made to subscribe to the initial capital or capital increases of small businesses, a tax reduction may be granted, provided that the shares are held until 31 December of the fifth year following the year of subscription. In addition, investments in specific FIPs, whose assets comprise at least 70 % of SMEs located exclusively in Corsica or the French Overseas Territories, may see the tax reduction increased to 30 %, regardless of the payment date in 2022. Investors must declare the amount of their investment on the accompanying 2042RICI form to benefit from these reductions.

In addition, investment funds are eligible for tax wrappers such as the PEA-PME equity savings plan, life insurance and the PER retirement savings plan, which offer income tax exemption on income and capital gains for any individual resident in France for tax purposes who undertakes to hold their shares for 5 years. Outside these envelopes, tax benefits vary according to the type of vehicle subscribed to and the length of holding period, with reductions of up to 18 % of the sums invested for FCPIs and FIPs, and an income tax exemption on capital gains realised on disposal for FCPRs.

Country-specific considerations

The tax impact of investment funds can also vary considerably depending on the investor's tax residence and the nature and geographical origin of the income. In the case of direct financial investments such as shares, dividends or bonds, taxation is generally due in the investor's place of tax residence. To avoid double taxation, countries sign tax treaties, bilateral agreements that set out the precise terms and place of taxation. These treaties may include non-discrimination rules to avoid differential treatment of taxpayers on the basis of their nationality.

Residents of uncooperative countries, which do not have tax treaties, may be subject to significant withholding taxes in the country where their investment was made. This highlights the importance for international investors of understanding the specific tax implications of each country when investing through investment funds. Tax treaties generally make it possible to avoid or limit double taxation through various mechanisms such as total or partial exemption of income already taxed in another country or tax credit for tax already paid abroad.

Conclusion and outlook

Through an exploration of strategies and expert advice on fund investing, this article has provided a comprehensive overview of the opportunities and challenges associated with investing in various types of funds. Whether for tax optimisation, portfolio diversification or professional investment management, investment funds are an essential component of any prudent investor's financial strategy. Mastery of fund selection criteria and an understanding of the tax impact are just some of the skills needed to navigate the world of financial investments with confidence.

Nevertheless, successful fund investing requires a balanced approach, taking into account the investor's specific objectives and risk tolerance. Tax implications, management fees and the degree of liquidity of investments are all factors that need to be scrupulously considered. In conclusion, although the financial environment can be complex and constantly evolving, we believe that it is important to keep a close eye on the market, a well-informed and appropriate investment strategy is the key to achieving your financial goals and maximising your savings.

Conclusion

Significant benefits and risk management

Investment funds offer significant advantages thanks to expert management and the opportunity to access a variety of asset classes. They are emerging as essential tools enabling investors to meet their financial objectives while controlling risk.

Importance of aligning objectives and understanding costs

It is crucial that every investment choice is aligned with an in-depth understanding of the associated costs and investment strategy. Personal risk tolerance must also be taken into account to ensure a match with the investor's financial objectives.

Careful selection and performance evaluation

The selection of an appropriate investment fund should be guided by a careful analysis and an assessment of past performance. It is important not to overlook the impact of fees and the fund's management structure. These decisions have direct implications for the ability to optimise the investment portfolio and capitalise on growth potential.

Tax incentives as a favourable measure

Investors also benefit from favourable tax arrangements, such as tax incentives in France, which can increase the attractiveness of investment funds as an investment option.

FAQs

Where should I invest €50,000 in 2024?

For those looking for a little more risk and return, unit-linked products (UL) are an attractive option. These investment vehicles offer a wide variety of assets in which to invest, such as equities, bonds, property or even shares in unlisted companies, also known as private equity. One of the major advantages of unit trusts is their management flexibility.

What are the two main categories of UCI?

Collective investments, or UCIs, fall into two main categories: UCITS (Undertakings for Collective Investment in Transferable Securities), which can be marketed throughout the European Union, and FIAs (Alternative Investment Funds), which represent other types of collective investment available on the French market.

What is the most attractive financial investment today?

In 2024, for an initial investment of €10,000 or more, the most attractive options include life insurance, Livret A savings accounts and pension savings plans.

What is the most advantageous investment today?

The Livret d'Epargne Populaire (LEP) is the highest-yielding risk-free investment available today, with an annual interest rate of 5%. It allows savers to deposit up to €10,000, while benefiting from exemption from social security contributions and tax.