Seeking security in investment
Investment funds are becoming increasingly popular in Poland. While in 2000 only around two to three percent of household assets were allocated in these funds, in 2005 the number grew to around 10 percent and is expected to reach nearly 20 percent by 2010.
Investment funds accumulate the small (or large) contributions of many clients, thus creating financial resources which give access to profitable investments, in the debt market, bonds or equities. The fund manager prepares a portfolio containing a number of different bonds, treasury bonds, equities or a combination of all of these and the client can freely choose the fund in which he wants to locate his assets.
A safe bet
"Investment funds are definitely not for somebody who wants to win large sums by speculating on the stock exchange. It is rather for someone who wants to collect money for a particular purpose, an additional pension for example. It is for those who do not want their money to lose value, but who are also not keen on risking," the president of consulting company PPE-Konsultanci and the author of a portal dedicated to investment funds, Maciej Rogala, explained.
"The client cannot judge the results of his assets from the perspective of a few months," he added.
The will to withdraw
Investment funds have one great advantage over savings accounts - the assets can be withdrawn at any time. Apart from this, the investor can convert the fund - that is move savings from one type of fund to another - at any time within the same management company's offer. Also, investment funds help avoid the infamous so-called "Belka Tax" on profits from interest. "We pay the tax only once - when withdrawing the money from the fund," an expert at financial advisory firm Expander, Maciej Kossowski, said.
There are a number of investment funds available on the market. Bond funds on average have interest rates similar to bank deposit accounts, however, bond funds hold the same advantage over savings accounts that all investment funds do, namely: the client has access to his money all the time. Bond funds consist of a mix of company or treasury bonds.
Another type of investment funds are the "stable-growth" and "balanced" funds. These are more profitable than bond funds due to a portion of the assets being located in equities. The "stable-growth" variety locatess between 20 and 30 percent of assets in equities, while in the "balanced" funds, equities make up around 50 percent of the portfolio. Remaining assets can be invested in companies' bonds and treasury bonds.
Minimizing risk
There are several measures which are intended to minimize the client's risk of losing the assets invested in a fund. In the case of equity funds, diversification of the portfolio acts as a safety instrument. The management company carefully chooses which companies' stocks will be offered in the portfolio. The tendency is to base the portfolio on reliable firms which can guarantee stable, positive results in the long-run.
"A fund is usually made up of stocks of WIG-20 companies plus some smaller firms which could grow by few hundred percent in the short-term," Kossowski explained. "The best enterprises might not have spectacular results in a year or in two and their prices might go down, but in a few years' span it is never the case," Rogala says.
"The risk of investing in equities through investment funds is the smallest of all types of investment in equities," Rogala said. The equity bonds are still the most risky ones on the market. "There are fluctuations on the stock exchange, so this type of funds are for investors with strong nerves," Kossowski said.
Outside ownership
Another safety measure is the fact that the investment fund is not owned, but only run by the investment fund management company. "Therefore, if the management company goes bankrupt, the depositary bank will look for another company to manage the assets. Similarly, when the depositary bank ceases to exist, the management company will find a new one," Rogala explained.
Equity funds are valued according to their market price. "There is no guaranteed interest rate, therefore there is no risk of bankruptcy," Rogala explained. In the worst case the client gets back only what he invested.
No repeat
Kossowski notes that the most popular investment funds in Poland are the stable-growth and the balanced funds, but he sees that more people are going for the most risky equity funds due to the bull market. "Last year was a great year for equity funds with the average rate of return around 23 percent," he said. However, Kossowski doesn't think that such great results can repeat: "The average rate of return should be around 15 percent, which is still much more than in the case of bonds or deposits in banks," he explains.
Expander's expert sees a potential dark horse this year on the bourse. "The SME sector has been growing rapidly recently. Investment funds offering securities of SME sector are already being established - this might be a recipe for high incomes in the future."
