How to invest in funds: a starter’s guide

So, you want to invest but are unsure how. 

You may already be investing in single-company stocks and want to diversify your portfolio, or you may be a seasoned investor who just wants a recap.

Don’t worry; we’ve got you sorted.

Here’s everything you need to know about investing in funds. Understanding the investment landscape involves knowing the roles and regulations governing investment institutions, including how they manage and provide services related to investments and the requirements for management companies.

But first, the fine print. 

Although this article can give helpful tips, we can’t give you personal advice. When you invest, you could get back less than you put in. This is because investments can fall as well as rise. If you’re unsure if something is right for you, you should always speak to an investment adviser.

What is a fund?

When you invest in the stock market, you can go it alone and buy shares in individual companies or you can have someone manage your investments for you in a fund, typically through a management company.

When you invest in a fund, your money is pooled with other investors. The fund manager then buys assets with that pooled money.

There are lots of different types of funds. For example, you can have an equity fund, which is just made up of shares. Or a bond fund, which is just made up of bonds.

Need a refresher on assets, stocks, and bonds? Check out our jargon buster!

Each type of fund has its own characteristics, but they all aim to offer investors the opportunity to diversify their investments, minimise risk, and maximise potential returns.

You can think of funds like a box of eggs. 

Each carton contains individual eggs grouped. That’s precisely what an investment fund does: It groups individual assets to form a larger fund.

Another type of fund you can invest in is a fund of funds.

If you thought funds were diversified, these take diversification to the next level!

Funds of funds are the equivalent of a supermarket crate containing many boxes of eggs. They can include a mixture of funds spanning different assets, such as stocks or bonds, and they can even include various geographies.

A real globe trotter.

They give investors more exposure to a broader range of assets without the investors themselves having to select and manage their portfolio of individual funds separately.

What’s the benefit of investing in funds?

We’ve already mentioned that investing in funds increases diversification across different assets, even other areas worldwide. But what’s the point?

Firstly, it takes the pressure off investors to do the legwork, which saves time.

But it also reduces risk.

When you invest in a single stock or bond, you take on more risk because your investment is tied to the performance of that one single asset.

This would be like going to the supermarket, taking one egg, throwing it in your basket and hoping it doesn’t crack on the way home. If it does crack, you have no other eggs to fall back on.

By investing in a fund, your money is spread across many different assets. Even if one doesn’t perform well, there are others that can.

What to think about when investing in funds

There are a few things to consider when choosing a fund to invest in. 

The first step is to ensure that the fund type is right for you. Additionally, the reputation and licensing of the management company overseeing the fund should be considered, as this can impact the quality of services provided.

1. What’s the aim of the fund?

Each fund has an objective that it’s trying to achieve. This means the fund could be designed to take on more or less risk, depending on the objectives the fund manager sets.

If you’re a slow and steady investor, or you’re nearing retirement, you might not want to take on too much risk. This is because the market can fluctuate, and the aim is to minimise your potential losses. On the other hand, you might be just starting out in your investment journey, or you might be younger and have more open investment goals. You may want to take on a little more risk to get higher potential returns, as your money will have longer in the market to weather financial storms.

Different funds also have different aims. Some aim to grow wealth, and some want to provide investors income through dividends. These are payments made to shareholders. When you buy shares in a company, you become a shareholder and you own a little bit of the company. You can buy shares individually or through funds.

Choosing the right fund doesn’t have to be complex. Knowing your investment strategy can help you find something that suits your needs.

2. What are the fees?

Investors tend to want the same things—a potential return on their investment and good value. When a fund manager invests for you, you pay a fee to cover the fund’s cost, including the management services provided.

Much work goes into maintaining the fund daily fees cover this and the cost of buying and selling. Remember that fees aren’t paid up front; they’re reflected in the value of your investments.

3. What’s the Track Record?

When choosing an investment fund, the track record is like a report card that shows how well the fund has performed over time. This historical performance can give you a glimpse into the fund’s potential for future growth. But what should you look for in a track record?

First, consider consistency. Has the fund consistently delivered returns over the years, or has it been a rollercoaster ride? Consistent performance can be a good indicator of stability.

Next, think about volatility. How has the fund fared during market ups and downs? A fund that can weather financial storms without too much turbulence might be a safer bet.

Also, compare the fund’s performance to its benchmark index. Has it outperformed the benchmark, or has it lagged? This comparison can help you gauge the fund’s effectiveness.

Lastly, check the manager’s tenure. 

How long has the current fund manager been in charge? A seasoned manager with a long tenure might bring more expertise and stability to the fund.

By analysing these factors, you can better understand a fund’s track record and make more informed investment decisions.

4. What’s the track record

The last thing to think about with funds is the performance. Now, there are no guarantees for investing because the market is quite fluid. It’s a bit like the ocean; sometimes it’s calm, and sometimes it can get choppy. 

There’s no predicting it.

We can’t use a fund’s past performance as a reliable guide to future results, but it’s an indicator of how the fund has performed in the good and bad times.

If it’s a steady eddy and doesn’t show much growth when the market is on the up, that might indicate performance. But that doesn’t always mean bad performance! If the markets are downturned and the fund isn’t following the same pattern, it’s withstanding those fluctuations.

It’s hard to find the sweet spot, but that’s why fund managers are experts!

Where can I get started with investment funds in Estonia?

A range of platforms offered by major banks and reputable investment brokers facilitate the embarkation of investment fund opportunities in Estonia.

These platforms provide various investment opportunities, whether you’re looking for long-term portfolio growth, active trading, or passive investing. Before investing, it’s always a good idea to compare fees, features, and the range of available assets to find the best fit for your financial goals.

Using a bank to invest funds

SEB Bank

SEB offers a range of investment services suitable for both beginners and experienced investors:

• Investment Funds – Access a wide selection of funds, including stock, bond, and money market funds.
• Regular Investments – Automate investments with recurring contributions.
• Securities Account – Trade and manage securities through SEB’s platform.
• Robo-Advisor – A 24/7 automated investment tool that provides tailored recommendations.

Swedbank

Swedbank’s investment services are accessible and offer a variety of options:

• Investment Funds – Invest in a range of funds that Swedbank and its partners manage.
• Regular Investment Plans – Set up automated contributions to selected funds.
• Brokerage Services – Trade stocks, bonds, and ETFs directly via Swedbank’s platform.

LHV Bank

LHV is known for its advanced investment platform, offering:

• Growth Account – A beginner-friendly way to invest small amounts regularly.
• Brokerage Account – Access to global markets, including international stocks and ETFs.
• Pension Funds – Investment opportunities for long-term retirement planning.

Luminor Bank

Luminor provides investment options with a focus on Baltic markets:

• Investment Funds – A range of funds managed by Luminor and international partners.
• Portfolio Management – Tailored asset management services.
• Online Trading Platform – A user-friendly tool to trade stocks and ETFs.

Using an investment broker to invest funds

Lightyear

Lightyear is an Estonian-founded investment platform offering:

• Commission-free ETF investing
• Low commissions on stock trades
• A seamless mobile-first experience

Admirals (formerly Admiral Markets)

Admirals, based in Tallinn and the UK, primarily target experienced investors.

• Access to forex, CFDs, stocks, and ETFs
• Advanced trading tools for active traders

eToro

eToro is a social trading platform that allows you to mimic other lead investors’ success.

• Social trading platform – copy top investors’ trades
• Low fees for stocks and ETFs
• Beginner-friendly interface

Monitor the fund performance

Once you’ve invested in a fund, it’s crucial to keep an eye on its performance to ensure it aligns with your investment goals. Regular monitoring can help you spot potential issues and make necessary adjustments. Here are some key metrics to track:

• Net Asset Value (NAV): This is the fund’s total assets minus its liabilities, divided by the number of outstanding shares. It gives you an idea of the fund’s overall value.
• Returns: Look at the fund’s total return, which includes dividends and capital gains. This will show you how much you’re earning from your investment.
• Expense ratio: This is the fund’s operating expenses expressed as a percentage of its average net assets. A lower expense ratio means more money is being invested rather than spent on fees.
• Turnover ratio: This indicates the percentage of the fund’s portfolio replaced each year. A high turnover ratio might mean higher transaction costs.

In addition to these metrics, monitor the fund’s investment strategy and holdings to ensure consistency with your investment objectives. Regularly rebalancing your portfolio can help maintain an optimal asset allocation and minimise potential losses.

Risk considerations of investing in funds

Investing in funds can be a great way to grow your wealth, but it’s essential to be aware of the risks involved. Here are some key risks to consider:

• Market risk: This is the risk of losing money due to market fluctuations. Even well-diversified funds can be affected by overall market trends.
• Credit risk: This is the risk that the fund’s holdings might default on their obligations. It’s particularly relevant for bond funds.
• Liquidity risk: This is the risk of not being able to sell your fund shares quickly enough or at a fair price. Some funds might be harder to sell than others.
• Manager risk: This is the risk of fund managers’ poor investment decisions. A manager’s strategy and decisions can significantly impact the fund’s performance.

To mitigate these risks, consider diversifying your investments across different asset classes and funds. Before investing, conduct thorough research on a fund’s investment strategy, holdings, and performance. 

And don’t forget to regularly review and adjust your portfolio to ensure it remains aligned with your investment objectives.

The tax implications of investment funds

Investing in funds can have tax implications that you should be aware of. Here are some key tax considerations:

• Capital gains tax: If you sell your fund shares for a profit, you may be subject to capital gains tax. The rate can vary depending on how long you’ve held the shares.
• Dividend tax: Dividends received from the fund may also be subject to tax. The rate can depend on your overall income and tax bracket.

It’s always a good idea to consult with a tax professional to understand the specific tax implications of your fund investments and to optimise your tax strategy.

Common mistakes to avoid

Investing in funds can be a rewarding experience, but it’s easy to make mistakes if you’re not careful. Here are some common pitfalls to avoid:

• Lack of diversification: Putting all your money into one fund or asset class can be risky. Spread your investments across different funds and asset classes to minimise risk.
• Poor investment timing: Trying to time the market by buying at peaks or selling at troughs can lead to losses. Instead, consider a long-term investment strategy.
• Poor research: Failing to thoroughly evaluate a fund’s investment strategy, holdings, and performance can lead to poor investment choices. Do your homework before investing.
• Reliance on past performance: Just because a fund has performed well in the past doesn’t mean it will continue to do so. Consider other factors, such as the fund’s strategy and market conditions.

By avoiding these common mistakes, you can increase your chances of success and achieve your investment objectives.