Open-end mutual funds, pension funds, life cycle funds. Still some funds, but what’s the difference between them?
We will guide you through three basic types of funds as institutions that can value your money.
People often confuse funds. This is due to the fact that there are too many of them and there are no major differences between them. At least that’s how it looks at first glance. However, the opposite is true. There is no fund like a fund. The first difference that catches the eye of everyone is the different names of the individual funds.
The second, much more hidden difference is that behind each fund is a different type of institution with a different investment strategy. It is given both to a specific company and its focus, but also legislatively. The benefits for the investor are also different. In some places, the lower possibility of income is supported by greater stability and the possibility of obtaining a state fee from the state.
The purpose of pension funds is to help provide participants in supplementary pension insurance for old age. Supplementary pension insurance is a product and pension funds of institutions. All pension funds belong to the wings of banks that do business in the Czech Republic. Although pension funds try to multiply the contributions of participants or their employers and state contributions as much as possible, their investment strategy is limited by legislation.
Ultimately, a participant in supplementary pension insurance can receive a state contribution to their deposits of up to CZK 150 per month, or CZK 2,000 from their employer, on the other hand, the yield is too low. The real appreciation of pension funds over the last ten years was 0.3 percent. Although pension funds generate returns from one to three percent each year, inflation is usually at a similar level. In addition, the state orders pension funds to be credited with a positive return. Even when pension funds fail to enhance participants’ deposits.
Open-end mutual funds
Open-end mutual funds are a product offered by investment companies. Like pension funds, they mostly belong to banking groups. We can also find independent investment companies on the market that have no bank or insurance company behind them. Open-end mutual funds mean that an investor – a unit-holder – may, at its discretion or on the recommendation of a bank or investment adviser, invest in mutual funds. At the same time, it has a guarantee of obtaining funds when selling unit certificates.
Mutual funds are further divided according to the investment strategy, which is based on the purchase of individual assets. On the market, you can buy unit certificates in equity funds, bond funds or, for example, money market funds. Investment companies also offer such funds that guarantee the shareholders the return of the principal (ie the amount invested). In return, they offer a lower appreciation and a notice period of several years. Funds of funds can also be bought on the market. This means that such a fund buys units of other funds.
Unlike pension funds, investment companies are not obliged to make a positive appreciation.
Life cycle funds
Life cycle funds or life cycle programs operate on a similar principle as mutual funds. They are run by investment companies. In contrast to conventional open-end mutual funds, life cycle funds offer a predetermined investment strategy that evaluates the investor’s money according to the length of the investment horizon.
Finally, it should be noted that past income from pension, mutual and life cycle funds does not guarantee future income. All money deposited or invested through the above types of funds is not subject to deposit insurance, as is the case with deposits of banks, credit unions and building societies.