Investing in funds 8 steps to your fund investment

Find out now: everything you need to know about investment funds and how to invest money successfully in just 8 steps.

Anyone who deals with the topic of investments today will find it difficult to avoid common financial wisdom such as “Equities are indispensable for a worthwhile investment”. At the same time, leaving your wealth in a savings book means getting low interest rates and dealing with rising inflation.  

However, not all investors have the time or experience to deal with current stock market price developments on a daily basis. So, how can equities be used to invest money securely and profitably without having to be an actual financial expert?  

It is worth taking a closer look at the financial instrument of investment funds (funds for short). These offer retail investors the opportunity to invest in a variety of securities at the same time without significant time and financial effort. The fund managers who manage and invest the fund’s assets are responsible for the actual investments. 

However, funds don’t just run by themselves either. Like any financial investment, they also involve certain risks and characteristics that you should take into account before making your investment decision. In this article, we therefore provide you with the most important information about funds and how to invest in funds in 8 steps.

An investment fund gathers the capital of several investors into one fund asset, which is usually managed, invested and reallocated by fund managers. The special feature of funds is the diversification of investments and thus also a certain risk diversification.

For example, an equity fund manager usually – but not always – invests all the capital not only in one share, or in only one bond in the case of a bond fund, but in several at the same time. The type of fund or the fund manager’s strategy determines which assets are invested in. 

Other funds, such as closed-end real estate funds, in turn invest capital in just one single asset. Such funds are often associated with higher potential returns, but at the same time carry high levels of risk, as there is no diversification.

In addition, closed-end funds involve investments that are subject to a different legal basis than open-end funds. Closed-end funds therefore offer no or only comparatively low legal protection for the assets of their investors.

Funds cannot always be clearly distinguished from one another. This is because certain aspects often overlap, meaning that a fund can be assigned to several categories at the same time. Take a red Tesla Model 3 as an example: it can be categorised as an electric vehicle as well as a red saloon. Thus, on the one hand, reference is made to a substantive aspect, being the operating principle (electric motor) and, on the other, to the form (red saloon). 

Similarly, funds are differentiated according to characteristics such as form and function. An equity fund can also be a sustainable solar fund if the fund assets are invested in sustainable companies from the solar energy sector, for example. 

But there are also specific criteria that differentiate different types of funds.

Open-end funds are traditional investment funds. As an investor, you can buy units in these funds at any time and sell them again at your desired time at the current redemption price. The number of fund units available for sale is therefore not capped and is not linked to any specific commitments.  

The fund units themselves are often not expensive, with the result that such funds are also suitable for cautious investors who want to start with less investment capital. Additional protection is provided by the strict legal requirements that open-end funds must meet in order to be able to sell their unit certificates to investors.  

Closed-end funds are a form of corporate investment and are not traded on the stock exchange, meaning that the fund units cannot be acquired or sold arbitrarily. The fund assets are accumulated from investors within a certain period of time and used for one or a few large projects, such as an office property or a shopping centre.  

The minimum holdings usually start at around 5,000 euros and go into the six-digit range. The term of closed-end funds is often a long period of 10 to 30 years. As the units cannot be sold on the stock exchange, a so-called substitute investor must take over the units in the event of a planned sale.

Due to their legal basis as a corporate investment, these funds offer only limited protection for investors. Closed-end funds therefore have significantly more pre-requisites than open-end funds and rely on a high risk appetite, high initial capital and, due to the long term, on long-term financial planning.

Active funds are, as the name suggests, funds actively managed by a fund manager. Their task is to observe and analyse various markets such as the tangible asset or securities market, for which other companies and analysts are also frequently consulted.

Based on current market research, the fund manager seeks to identify assets that are as close as possible to the investment strategy of the relevant fund in order to align their investment decisions.  

For this purpose, fund managers analyse existing data that has proven helpful in the past in order to make as specific a diagnosis as possible for the future. Despite having all the specialist knowledge, even the best analyses cannot reliably predict the future, which is why active fund management is always associated with a certain degree of uncertainty.

Active funds also have higher costs than passively managed funds due to the active management and service provided by the fund managers. 

Passively managed funds are not managed by experts, but usually map an existing stock exchange index on a computer-controlled basis. A DAX fund, for example, comprises shares in the 40 companies listed on the DAX. By investing in such a fund, you participate directly or indirectly in the performance of these companies and thus in the performance of the DAX.  

The benefit of passive funds lies in the low costs. Management fees are significantly lower here than for actively managed funds, often below 0.5%. The most popular passively managed funds include ETFs, i.e. exchange-traded index funds. Investors in passive funds are therefore dependent on market fluctuations and possible price drops, which – unlike actively managed funds – cannot be avoided or mitigated by switching.

Accumulation funds are those that do not pay you your return at regular intervals, but reinvest your profits. If you have invested 10,000 euros and receive a return of 500 euros at the end of the year, this amount will be added to your investment amount in the case of accumulation funds.  

The advantage of accumulation funds is the compound interest effect, which is to your benefit. In the process, what you have earned in returns in the first year is added to your original investment amount, which is why your investment amount increases steadily and you earn more and more returns from the second year onwards. However, the disadvantage of such funds is that you will not receive your return until you redeem your fund units. 

However, the majority of funds are distribution funds that pay out the dividend you have earned on a regular basis. So if you are entitled to a return of 500 euros on your 10,000 euros investment capital at the end of the year, you will receive this in your bank account. This means that your profit does not continue to earn interest, but you can dispose of it freely – it is not for nothing that such profit distributions are considered by some to be a bonus month's salary.

The return on your fund investment ultimately depends on what kind of fund it is and which assets are included in the fund. In principle, a fund’s return can be attributed to how diversified it is:

while broad diversification can reduce risk, investors can also expect lower returns. According to the BVI fund association, German equity funds, for example, have achieved an average return of 7.8% in the last 10 years.

Similar to returns, costs also depend on the type of fund. However, this is less about actual assets and more about whether the fund in question is actively or passively managed.

Passively managed funds are usually cheaper and have a total expense ratio (TER), i.e. an overall expense ratio of around 0.1% to 0.5% of all costs and fees incurred by a fund per year. Actively managed funds, on the other hand, entail a higher administrative expense, so the total expense ratio here is slightly higher.

The amount of the one-off initial charge (also known as the premium) due on the purchase of the fund units is not proportionate to actively or passively managed funds, but depends on who issues the fund units and who distributes them. These costs therefore vary depending on the provider or bank.

Now that you have become familiar with the different fund types, their characteristics and risks, nothing stands in the way of your own fund investment. It is now important to apply your new knowledge if you want to invest in funds safely and profitably.

Investors differ – just like their preferences and visions for the future when it comes to their money. Defining your investment objectives is about starting here and finding out what you want to achieve when you invest your money in funds. Do you simply want to build up your private wealth or do you have specific intentions such as financing a home or providing for your children? 

These different objectives affect how much money you should invest in funds over what period of time and also the risks you take with your investment. The more specifically you can define your investment objectives, the better you can plan your investment.

Funds can be assigned to different risk classes depending on their focus. Once you have determined your personal investment objective, the second step is to deal with the risks. Do you prefer to achieve high returns on your investment and take higher risks, or do you prefer to play it safe and know your money is well looked after? Your individual assessment is also important here. 

Be honest, because your investment should be tailored to you as much as possible in order to avoid disappointments or uncertainties at a later stage. If you don't have a high risk tolerance, then it is better to stay on the safe side and rely on stable and lower-risk funds. Even if you want to invest money for your children, for example, you are better off with value-preserving products.

The term of your investment also affects which funds you are likely to consider and their risks and return opportunities. The reason for this is because aspects, such as minimum holding periods for shares or deadlines for share redemptions, differ depending on the product. You should therefore calculate whether or for how long you can dispense with your investment amount. There are three common periods of investment:  

1. Short-term investment horizon (1–3 years): Those who want to prepare for retirement or maintain the value of the acquired assets over a short period of time usually have an investment horizon of a few years. Investors who value safety cannot expect high returns over this short period of time. Those who speculate on high returns within three years, for example with equities or cryptocurrencies, must take corresponding risks and, in the worst case, accept a total loss. So if you only want to invest for a short time, it may well be the case that you will have to sell your shares at an unfavourable time and therefore have to accept significant losses.  
   
   
2. Medium-term investment horizon (3–10 years): Those who invest their capital for at least three years have enough time and financial leeway to allow their own capital to work. Here, the investment capital can be divided between stable and slightly higher-risk products, such as equity funds or ETFs. This will allow you to achieve good returns, while the associated risks can be absorbed by more stable fund products.  
   
   
3. Long-term investment horizon (10+ years): An investment horizon of at least 10 years opens up a number of possibilities, for example you can make long-term and continuous provision for your old age. If you invest in funds to build up your assets, you can also take some risks during this period. This is because you then have plenty of time to withstand price fluctuations and wait for them to balance out.

But keep in mind: your fund investment depends on your situation – if you have an investment horizon of at least 10 years but do not want to take any risks, there are enough solid and low-risk funds available.

You now know the main requirements you should consider when investing your money in funds. But before you decide on a fund and buy units, you should know what financial resources are available to you for your investment. 

Make a realistic assessment of your finances: What regular income and expenses do you have? Are there loans which you still need to finish repaying? Do you have a reserve to cover any repairs or new purchases? 

Make sure that you have considered all foreseeable costs before determining your investment amount. This is the only way to ensure that you will not have to access your investment amount again after a short time and pay high fees such as initial charges for this.

Now that you have determined what amount you can and want to invest in funds, it is time to find the product that is right for you. 

If you expect high returns from your investment and want to keep your money available at the same time, an equity fund may be just right for you. The higher the potential returns and liquidity of the fund, the higher the associated risks. Equity funds are therefore among the more risky fund products. 

If you prefer safety and stable returns, an open-end real estate fund could be the right choice for you. Here, you do not have access to your money for around two years and invest in a low-risk, stable product. This is where the sustainable open-end real estate fund hausInvest comes in. With 17 billion euros in fund assets, it is one of the largest German real estate funds and boasts a high level of diversification with over 150 investment properties worldwide. 

For investors who want to invest their capital in a future-proof investment in the long term, it is worth taking a look at the klimaVest renewable energy fund: this long-term tangible assets fund invests in over 25 wind farms and solar parks throughout Europe and, thanks to long-term purchase agreements, ensures stable cash flows and reliable potential returns.  

At the same time, an investment in renewable energies adds a new and forward-looking asset class to investors’ portfolios, which will become increasingly important in the long term as the demand for energy continues to increase.

Before your investment can really start, you have to decide: One-time investment or savings plan? The name says it all: with a one-time investment, you invest a fixed amount in the fund of your choice all at once. Whether it remains at that or if you want to invest further amounts in the fund after a certain period of time is of course up to you. 

However, this type of investment is generally more suitable for you if you want to invest higher amounts, for example 10,000 or 50,000 euros. These can be your earned assets, a cancelled savings book, or you may have received an inheritance and now want to invest it. 

If you opt for a fund savings plan, you will invest smaller amounts at regular intervals, for example monthly or quarterly. The investment amounts are usually flexible and can be adapted to your situation, depending on how much money you have available. 

For investors focused on safety, such savings plans offer the benefit of the cost-average effect. This means that fluctuations in the level of unit prices can be repeatedly compensated for by regular payments and investors often even pay lower average prices in the long term.

In addition to these two common options, you can also take advantage of a hybrid model by investing some of your assets in a one-time investment and also investing in the fund by means of regular savings plan instalments.

The sooner you invest in funds, the longer your capital can work for you. So start early rather than late – and ideally right now.  

Cautious or inexperienced investors in particular will always find a reason to postpone the investment for another time in the future. However, this wastes valuable time that could be used to maintain or increase your capital. With actively managed funds in particular, your money is in expert hands. They save you from time-consuming market analyses and you don't have to wait for the next price crash to take the deciding step.

In order to invest money, you need a custody account in which your securities are held and administered. There are many different providers of custody accounts and they all offer different services and have different charges, from your regular bank to online banks and specialised fund brokers. 

It is particularly worthwhile for investors to study the cost schedule of initial charges as this is often where the highest fees are incurred. Therefore, make sure that your securities account provider offers as many different funds as possible as well as funds without initial charges. Cheaper online banks are usually more suitable for this than your regular bank. 

Your regular bank can also be a good place to open a custody account if personal loyalty is more important to you than the lowest possible initial charges. But there are a few things to keep in mind here, too: Many regular banks now generally only sell their own financial products. In such a case, as an investor, you must therefore be satisfied with investment products that may not be quite up to par in a direct comparison with others. 

It is therefore best to inform yourself in advance as to which funds could be of particular interest to you. In the next step, you can compare different custody account providers and the funds they offer in order to find the best offer for you and open the right custody account for you. 

To sum up, once you know your goals, your risk tolerance and your investment horizon, and once you have determined your investment amount and selected a suitable custody account provider, you are ready to proceed with your investment. Use funds for wealth building or for your pension and let your money work for you without any worries. We wish you every success with your fund investment.