Funds as an alternative to a savings account?

For short-term reserves, i.e. for setting aside a nest egg, the fact that the earnings that are generated are lower is not so important. In the case of a long-term investment focused on wealth accumulation, however, lower earnings and substantially higher inflation are much more significant. And there is no end in sight. For traditional savers, this means that they have to search for alternative forms of saving if they want to increase their earnings potential – while accepting a higher level of risk. A clear trend towards securities or funds has been seen in the past year. However, people often have a certain degree of uncertainty when it comes to this new form of investment, which frequently gives rise to questions:

“Savings accounts are covered by the deposit guarantee scheme, but what happens if the fund company becomes insolvent?”

Because funds are segregated assets, they also offer protection in such a case. According to the Austrian Investment Fund Act, funds are strictly segregated from the other assets of the fund company. This means that the fund assets and the ability to access them are preserved for the unit-holders even if the fund company or the custodian bank go bankrupt. The Investment Fund Act is a federal act that governs the relationship between investors and investment firms. It provides the legal framework for the management of funds in Austria. And it focuses primarily on protecting investors.

“Aren’t funds just for wealthy people?”

Many savings account customers think that you can only invest in funds with large amounts of capital. This is a misconception that needs to be cleared up: It is possible to invest starting from EUR 50 per month – although it is also possible to start with a slightly higher amount, of course. Thus, fund-based saving works even with small amounts!

One unique aspect of investing in funds on a monthly basis is the so-called cost averaging effect: When you make regular investments of the same amount in funds, you acquire more or fewer units for one contribution depending on the current price of the fund. As the contributions remain the same, you purchase more fund units when prices are low, and fewer units when prices are higher. Because more fund units are acquired when prices are low, this results in a more attractive average purchase price over the long term – though capital losses cannot be ruled out. This means that for people who invest regularly and have a long investment horizon, it can even be advantageous when prices fall at times.

“Aren’t investments in funds risky?”

It is certainly important to have a savings account available for emergencies, i.e. for short-term investments. But is it smart to put all of your eggs in one basket? The same is true for investment funds. Only broad diversification across many different asset classes, markets, sectors, and currencies can reduce the risk to a reasonable level. Naturally, however, capital losses can never be ruled out entirely.

Fund management is aimed at reducing earnings fluctuations by distributing assets across various forms of investment. Therefore, a portfolio is made up of a high number of securities from different issuers and from a wide range of sectors. In the case of international portfolios, securities from various countries and in different currencies help to support the risk diversification. The funds of Raiffeisen Capital Management adhere to this principle of diversification to a high degree because they can combine a variety of different securities. Thus, the extent of the price fluctuations also depends on the type and composition of the fund.

“I don’t know enough about the financial markets and don’t have any time to deal with them!”

An investment fund is a very modern form of investment because it is based on the work of professionals: It requires experience to invest money in equities, bonds, real estate, or commodities with funds. Fund managers with appropriate expertise monitor and analyse the capital markets. They scrutinise sectors, countries, and companies very carefully. Thus, the resulting selection of securities and the ongoing monitoring and optimisation of the fund portfolio are performed by specialists. This allows the individual security risk to be optimally reduced. Nevertheless, market-related price fluctuations can also lead to capital losses.