The remedy for bank deposits scraping the bottom and rising inflation might be investment funds. However, to effectively increase our wealth, we need to choose them skillfully, meaning they should be tailored to our preferences.
A bank deposit is a fundamental solution for many people when it comes to growing their savings. The issue 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 under these conditions?
More accessible options include investment funds, where 2.5 million people hold 270 billion PLN (according to Analizy Online). But is this an effective way and does it allow for a quick increase in the value of your assets?
Choose investment funds wisely
There is no simple answer to this question. It all depends on the choice made. There are different types and categories of investment funds, each with a diverse investment policy (investing capital in various instruments and assets) and intended for different types of clients. The rate of return is also influenced by the investment period, macroeconomic conditions, and specific market situations.
Conclusion?
The choice of fund should be well thought out. It will be helpful to follow several criteria. These will help create your investor profile, determining how long, where, and in what to best invest your money. You'll also gain a starting point for outlining an investment strategy, which means building a specific portfolio.
Otherwise, you might hit a snag, meaning you could incur a loss and become discouraged from this form of wealth growth. Compared to bank deposits, it 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. Just fill out a questionnaire, and the system will propose the most optimal solution.
How to choose an investment fund?
The mentioned factors that facilitate fund selection:
• Risk tolerance – the level of accepted losses (whether we agree to lose part, most of the capital, or not at all),
• 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 rate of return within the given horizon,
• Current and expected financial capabilities (how large and frequent contributions we can afford, whether our professional and family situation is stable).
The shorter the investment perspective we adopt, the safer type of fund we should choose. This way, we mainly protect the capital and avoid losses, but also limit high gains.
Treat investment funds as long-term
The share of risky (potentially more profitable) instruments in the portfolio can also be determined using a universal formula: 100 – your age. This implies that the younger we are, the longer the investment horizon we should assume and the more aggressive funds we should choose.
Why?
Over a longer period, managers have a better chance to recover potential losses that risky equity and derivative instruments may bring due to economic cycles and unexpected events.
Risk pays off, but not always
That's the theory. In practice, excellent results can also be achieved in the short term. A perfect example is last year. All equity fund families gained then. The most effective were those that invested clients' money in Western European stock exchanges. They earned an average of almost 26%, but in 2018 they lost nearly 15%. In comparison, Polish government bond funds achieved a return rate of 3.9% last year, which is half more than the previous year (2.6%). Not spectacular, but more than a deposit and without losses.
