Finance

Simply explained – definition, advantages, minimizing risks

In times of low interest rates, it makes sense to invest your money in stocks. It’s easy with an equity fund. But what exactly is that? And how do I find the right equity fund for me? Our overview for fund beginners.

Interest has been in the basement for years. This saves a lot of savers because there is hardly any income on the overnight or fixed deposit. If you want to build up a fortune with your savings, you can hardly avoid stocks in the long term.

You also want to benefit from the profits of the stock exchange, are at the Selection of individual stocks but not sure? Then an equity fund might be the right way to get you started.

An equity fund is a bundle of a variety of stocks from which you can buy shares. Instead of individual securities, you get a number of different company shares at once. By investing in an equity fund, you can easily spread your money across different companies, industries and countries, thereby minimizing your risk of making losses.

At the same time, many equity funds promise significantly higher returns in the long term than savings books or overnight accounts. Depending on the composition of the equity fund, the annual return, i.e. the profit you get from an investment, can be more than six percent on a long-term average. Find out exactly what is behind equity funds – and what you should pay attention to when buying.

How to secure your equity fund share in three steps:
1. Open depot:
First of all, you have to open a custody account at a branch bank or online at a direct bank. The deposit at a direct bank is often free of charge.
2. Choose fund: Use the comparison portals to find out which equity fund or ETF is suitable for you. In addition to the total expense ratio, keep an eye on the risk class. The rule is: the higher the risk, the greater the chance of making high profits – but also the probability of making losses.
3. Buy and wait for the fund unit: You can find the fund and buy a share through your securities account using the securities identification number (WKN). Experts advise that you only invest money in an equity fund that you do not need for 15 years or more. The longer you invest your money, the lower the risk of making losses. Because in the long term, short-term price fluctuations balance each other out.

What is a fund?

A mutual fund is a collection of securities that generate income for their investors. As an investor, you can invest your money in the fund by purchasing individual fund units. In this way, you as a shareholder participate in the return of the fund.

Funds are usually offered by banks, fund companies or investment companies that collect the money from savers and investors. Known Investment companies are for example Blackrock, Fidelity, Union Investment or the DWS Group. Funds that are aimed at private individuals are called mutual funds. There are also special funds that are only accessible to professional investors.

The Fund management can invest their clients’ assets in different types of securities or goods. In addition to stocks, this includes bonds, real estate or raw materials. Regardless of the composition of the bundles, funds have a decisive advantage for investors: Compared to an investment in individual investment products, funds offer a much greater spread of your money and thus a much lower risk of loss.

How does an equity fund work?

A Equity funds invests – as the name suggests – exclusively in shares. So an equity fund is a basket, of many different company shares contains.

If the companies in the equity fund perform well and generate profits, the share prices of the companies on the stock exchange and thus the price of the fund will rise. The good thing for you as an investor: If the share of one company in the fund falls, the price increase of another company may make up for the loss. Compared to individual shares, your risk of loss with a share fund is therefore significantly lower.

ETFs are cheaper than traditional equity funds

Equity funds can basically be divided into active and passive funds. In the case of actively managed equity funds, one controls Fund manager the investment strategy. This means that he thinks about which shares he buys and which he sells – depending on the current price of the respective share.

In the case of passive funds, a computer algorithm decides on the composition of the share basket instead of a fund manager. The Fund management is basically an algorithm. This forms a stock index like the Dax according to which the 30 largest listed companies in Germany are listed.

A passive equity fund is therefore also called an index fund,or ETFs for short (“Exchange Traded Funds”). The following applies to ETFs: If the value of the share index increases, the price of the ETF also increases. Whoever holds shares in him makes profits.

Do I also get a dividend from equity funds?

A dividend on stocks is the part of the profit that a company makes to its Shareholders pours out. But not every company that is listed on the stock exchange does that. There are also companies that have never, or only irregularly, shared in their profits with their shareholders.

Even if you don’t own individual stocks but have invested your money in an equity fund or ETF, you can still benefit from dividends. To do this, when choosing your fund, you need to make sure that you invest in a so-called dividend fund or dividend ETF, which contains shares in companies that regularly share in the profits of their shareholders.

You also receive dividends with equity funds

Whether you want to receive a dividend is your own decision. One thing is clear: even if no dividend is paid, you can benefit in the long term. If a company does not even share its profits with its shareholders, it can have the advantage of reinvesting the money – for example in research and new products. This may also increase the value of the company and thus your return in the long term.

It is also possible that companies distribute a dividend, but the equity fund retains the money and reinvests it. In this case, one also speaks of reinvesting equity funds or ETFs. As an investor, you benefit from the compound interest effect. Put simply, the money invested increases every time new dividends are added.

This means that the sum of your assets in the fund grows without you having paid in more. Therefore, if you are not dependent on regular dividend payments, it is recommended that you invest your money in equity funds that keep the dividend.

Where can I buy equity funds?

Often it is said that one would buy an equity fund, but this is not entirely true. In fact, you only invest your money in one fund. So you buy a fund share, a piece of a large cake, so to speak.

You can either do this at your branch bank – or on the Internet Direct banks. Alternatively, you can also buy fund shares from asset managers and Investment companies that the equity funds offer.

You will be advised if you buy an equity fund share in your branch bank. However, you may not get the cheapest offer. Because many banks are interested in providing you with their own fund products, which are relatively expensive. For this reason, branch bank investment advisors are reluctant to suggest ETFs as the bank earns more from more expensive, actively managed equity funds.

Direct banks are cheaper than branch banks

It is therefore recommended open a custody account with a direct bank on the Internet. A custody account is, so to speak, an account for the funds and stocks in which you invest. While branch banks usually charge custody fees, stock accounts with direct banks on the Internet are usually free of charge. That means you save costs that you have to deduct from your return.

Do you have an equity fund or ETF you want to invest in, you can search for it on the Internet using your securities account (WKN) or international identification number (ISIN) and find shares in the fund at a trading venue such as the stock exchange or at a direct dealer who holds fund shares in stock , acquire.

What taxes do I have to pay when investing in equity funds?

Equity funds are created using a so-called Advance flat rate taxed. This will be calculated by your custodian.

The so-called flat rate falls on this flat rate Withholding tax at. In the case of equity funds (i.e. funds with an equity component of at least 51 percent), 30 percent of the advance fee is tax-free. This is called “partial exemption”.

You pay 26.375 percent withholding tax (including the solidarity surcharge) on the rest, i.e. the 70 percent of the non-exempt income. Here the church tax can be added. The direct bank with which you have your deposit transfers the tax directly to the tax office. You don’t have to worry about it.

You should also set up a so-called exemption order with the custodian. Because: Income up to 801 euros for singles or 1,602 euros for married couples are completely tax-free, that is the “Saver lump sum“. If you stay below this amount with your earnings, you do not have to pay any taxes.

How do I find the right equity fund for me?

To find the best stock fund for your life situation, you should different funds compare. The selection is large: in Germany alone there are more than 3,000 equity funds with different investment focuses. To help you find your way around, there are various portals on the Internet that you can use to find the right equity fund for you.

On these portals you usually first have to state that you want to invest in an equity fund. Alternatives are also raw materials or Real estate funds to choose from or Mixed fundsthat combine different investment products (see below). You also have to enter the term, i.e. how long you want to invest in a fund.

Fund volume and age are important criteria

Another criterion is the amount you want to invest. This can either be a one-time investment, for example 1,000 euros, or a monthly payment as part of a savings plan.

You can often also specify the fund company that offers the fund you want. However, this shouldn’t be so important to you: make a fund less dependent on who operates it – then you have a larger choice.

The age of the fund and its investment volume are more important when choosing an equity fund. This means the total assets that the fund already manages. Funds that have been around for a long time tend to be less risky than younger funds.

Here you can also analyze the fund’s performance over a long period in the past. A high one Fund volume also speaks in favor of a less risky fund, since this often involves a broader diversification of the investment money.

Pay attention to the risk class

Another important criterion is the investment strategy of the equity fund: You can see how risky it is from the so-called risk class. You will find this in the “package insert” of the fund. The scale of the risk classes ranges from one to seven and describes the fluctuation of the fund price in the past. One means a low risk (small price fluctuations), seven an extremely high (strong price fluctuations).

The basic principle is that a potentially higher return always goes hand in hand with a higher risk. So before you invest, think about the maximum risk you want to take. As a beginner, you should rather buy shares in equity funds whose investment strategy entails a low risk. If you feel uncomfortable, you’d better forego some returns rather than taking too much risk.

At the end of your search, you will likely have a longer list of similar equity funds in mind. You can compare these funds with each other in the next step (see below). You can either do this directly on the relevant portal website, or you can find out about the equity funds elsewhere. For this you need the securities identification number (WKN) or the international identification number (ISIN) of the respective equity fund.

How do I compare equity funds?

The best way to compare equity funds and ETFs is on portals on the Internet. Before that, you should have thought about how long and how much money you want to invest and how much risk you want to take when investing (see above).

An important comparison criterion is the past performance of the equity fund. This course development from the past is never a guarantee of future profit opportunities. Nevertheless, at first glance, it serves as a good guide to see whether an equity fund is growing strongly or moderately.

It is important to remember that when comparing prices, always consider the equity fund’s investment strategy. A five-tier equity fund or ETF tends to grow faster than a lower-risk two-tier fund – but it can also make losses faster.

Keep an eye on the costs

The price, i.e. the one-off and ongoing costs, is also decisive. In general, costs should be as low as possible because they reduce your return. Therefore, pay attention to the Total expense ratio. This includes all costs, including administrative fees, for example. The lower the percentage rate, the better.

Some comparison portals state the administration fees and the so-called front-end load instead of the total expense ratio. The front-end load is the price you have to pay when investing in an equity fund. The amount varies from fund to fund and is measured as a percentage of the total investment. The administration fees are the annual running costs. The same applies here: try to keep the percentage as low as possible.

How can I best spread my risk?

To keep the risk of making losses as low as possible, you should spread your investment as widely as possible. Therefore, especially for beginners, the following also applies to equity funds: Find a fund that contains as many different stocks as possible from companies in different industries.

The easiest way is with so-called index funds, or ETFs for short, the one Stock index replicate. The best-known German stock index, for example, is the Dax, which brings together the 30 largest listed companies in the country. These are, for example, Adidas, BMW, Bayer or Lufthansa.

The idea of ​​an index fund using the Dax as an example: If the average value of the 30 companies increases, the price of the corresponding ETF also increases. If the value of the companies falls, the price of the index fund also falls.

With ETFs, you can invest in more than 2,500 companies

In addition to the Dax, there are many other stock indices. For example, the MSCI World Index tracks the performance of the 1600 largest corporate stocks from 23 industrialized countries. ETFs that track this index are considered relatively safe.

The MSCI All Country World index, which contains shares of the 2,500 largest listed companies in the world, offers an even wider spread. In this way, it covers the entire global economy, including emerging countries. ETFs that track this index are also considered low risk. After all, it is unlikely that all of the stock prices shown will fall sharply at the same time.

Are ETFs Better Than Managed Funds?

As a rule, yes. There are several reasons for this:

  1. Costs: Because ETFs computers track a stock index, they are cheaper than traditional stock funds. After all, there is no need to pay a manager to look after the equity fund. ETFs generally incur costs of less than 0.3 percent of the total investment per year. Actively managed funds sometimes charge up to five percent of the investment amount.
  2. Yields: In the long term, ETFs achieve a return that is at least as high, and often even higher, than classic actively managed equity funds. This is because even experts rarely succeed in making exact forecasts of future market developments – in order to generate better returns than the broad mass of investors.
    A study by the American company Dow Jones Indexes, which offers various stock indices, shows, for example: Over a period of ten years, more than 95 percent of actively managed American stock funds will lag behind the performance of the S&P 500 stock index. ETFs that track this index with the 500 largest American companies therefore generate a higher return than most American equity funds managed by a manager.
  3. Transparency: Another advantage of ETFs is the greater transparency compared to conventional equity funds. As an ETF tracks a specific index, you as an investor always know which stocks the fund contains. Actively managed funds are often less transparent, and investors often only find out which shares the fund is made up of with a time delay or on a certain key date.

How long should I invest in an equity fund?

As always on the stock market, the following also applies in the case of equity funds: the longer you invest your money, the lower the risk of making losses. Because in the long term, short-term price fluctuations balance each other out. Experts therefore recommend that savers should invest their money for at least 15 years or even longer.

Over this period, you generally also generate a good return, as can be seen from the example of the Dax: the value has been in the past 20 years an ETF that tracks the indexto have increased by more than 80 percent. One reason for this is the compound interest effect. Invested money increases every time new money that was previously generated is added.

What is the difference between equity funds, bond funds and mixed funds?

As mentioned, there are different types of funds. They differ in the type of investment they represent. In addition to stocks, forms of investment include bonds, raw materials or real estate. There are also funds that offer a combination of different types of investment, so-called mixed funds.

  • Equity funds are funds, who only invest in stocks. There are active equity funds that are managed by a fund manager and passive equity funds that track a stock index such as the Dax using a computer algorithm. Passive equity funds are also called index funds, or ETFs for short. They are significantly cheaper than active equity funds and offer a wide spread of your money across different companies.
  • Pension fund do not contain stocks, but bonds. In this case, the word “pension” has nothing to do with your old-age pension. Rather, in the financial world it means a security with which private individuals lend money to a company or a state in return for the payment of an interest. This security is also called a bond. The interest rate on this bond depends on the level of the respective risk. As a rule, bond funds are exposed to lower price fluctuations and are therefore considered to be less risky.
  • A Mixed funds combines different investment options with each other. That means, for example, that he invests in both stocks and bonds. He can also invest in gold or real estate. If you are interested in investing in a mixed fund, check how high the respective proportion of safe and, in comparison, profitable investment opportunities is. If in doubt, forego some returns to lower your risk.

What happens to my money when a fund goes bankrupt?

A fund company is relatively unlikely to file for bankruptcy. If it does happen, you needn’t be afraid of it. Your money is called something Fund namely protected.

That means: The Investment companies are obliged to keep the investment money separate from their own money – with an independent custodian. If the fund provider becomes insolvent, this money will not be touched by the insolvency administrator.

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