Investment funds can be the remedy for bank deposits that are stagnating and rising inflation. However, to effectively grow our wealth, we need to choose them wisely, meaning tailor them to our preferences.
Depositing money in a bank is a basic solution for many people to grow their savings. The catch is that their interest rate (1.21%) is currently the lowest in history. Additionally, inflation (4.4%) has risen to the highest level in eight years. How can you take care of your money in these conditions?
More accessible options include investment funds, where 2.5 million people hold 270 billion PLN (Data from Analizy Online). But is this an effective method for quickly increasing the value of your assets?
Choosing investment funds wisely
There is no simple answer to this question. Everything depends on the choice made. There are various types and categories of investment funds, each with different investment policies (allocating capital across diverse instruments and assets) and intended for different types of clients. The return rate is also influenced by the investment period, macroeconomic situation, and conditions on specific markets.
The conclusion?
The choice of a fund should be well thought out. It will be helpful to consider several criteria. These will help us create our investor profile, i.e., determine how long, why, and where to best invest our money. We will also gain a starting point for developing an investment strategy, i.e., building a specific portfolio.
Otherwise, we risk stepping into a minefield—suffering losses and becoming discouraged from this form of wealth growth. Compared to bank deposits, this method has much greater potential and requires only a bit more effort from the investor. Currently, there are tools available on the market that assist in making a choice. Simply fill out a questionnaire, and the system will suggest the most optimal solution.
How to choose an investment fund?
The factors that facilitate choosing a fund include:
• risk tolerance – the level of acceptable losses (are we okay with losing part or most of our capital, or do we not plan to lose anything),
• investment goal – what we want to grow our savings for (e.g., down payment for a mortgage, dowry, children’s education, retirement),
• investment horizon – how long we definitely won’t need the invested funds, how long we can part with them,
• expected return over the given horizon,
• current and anticipated financial capabilities (how large and frequent deposits we can afford, whether our professional and family situation is stable).
The shorter the investment horizon, the safer the type of fund we should choose. This primarily protects the capital and avoids losses but also limits high gains.
Treat investment funds as long-term investments
The proportion of risky instruments (potentially more profitable) in the portfolio can also be determined using a universal formula: 100 – your age. This suggests that the younger we are, the longer our investment horizon should be, and the more aggressive funds we should select.
Why?
Over a longer period, managers have a better chance to recover any potential losses that cyclical economic patterns and unexpected events might cause in risky equity and derivative instruments.
Risk pays off, but not always
That’s the theory. In practice, excellent results can also be achieved in the short term. An ideal example is last year. All equity fund families gained during that period. The most effective were those investing in Western European stock exchanges. They earned an average of nearly 26%, but in 2018, they lost just under 15%. In comparison, Polish government bond funds achieved a return of 3.9% last year, which is twice as much as the previous year (2.6%). Not spectacular, but better than a deposit and without losses.
