Index funds for investment

Those wishing to invest free funds have a choice of financial instruments, from the most popular bank deposit to investing in the stock market. If you track financial markets every day there is no time or opportunity, then you should consider investing for a long-term period. You can independently analyze the market and buy shares through a broker, contact the mutual fund or buy index funds.

Definition

Index Investment Fund (ETF) is a portfolio of securities that form the basis of any index. Stock indices are relative indicators, which are formed from the value of securities of blue chips, that is, the most developed companies in the country. They show the economic situation in the domestic market. Such indices exist in every country. In the US - it's the S & P 500, in Germany - DAX, and in Russia - the RTS and MMBB.

Index funds repeat the structure of the base index. It includes shares of a certain country, region, price, or they are grouped by companies that produce the same goods. The shares in them can be bought and sold all day long. The commission of the manager is 0.5% of the value of the assets. This is the main advantage of ETF over the mutual fund.

The MICEX index includes shares of 45 largest companies. The specific gravity of each is determined in proportion to capitalization, but it can not be more than 15%. In the largest companies, a huge share of human labor is concentrated. From it, the value of shares is formed. The average yield of the stock is 5% higher than the inflation rate. Against this background, speculative methods are more effective. But in the long term, in terms of capitalization of interest, a small income will yield a good financial result.

Statistics

The first ETF under the name TIP 35 was registered on the Toronto Stock Exchange in 1990. It was followed in 1993 by the US SPDR S & P 500, originally called SPY, and NASDAQ-100. In the 2000s, the investment market was booming. To date, there are 4,724 investment funds. Their total volume of assets is $ 2.867 trillion, of which $ 127 billion is accounted for only by the S & P 500. Index funds in Russia first appeared in 2013. Then on the Moscow stock exchange an ETF was registered under the name FinEx. In Russia, the ETF's application is regulated by the Federal Law "On Securities Market". The active growth of trading volume on ETF began in 2013. Due to the fact that investors transferred funds from mutual funds to ETF, the annual trading volume exceeded $ 2 trillion, an increase of 27%.

ETF VS Mutual Fund

Index funds of shares are similar to mutual funds on a number of criteria:

• Professional management (PIF is managed by the manager, and ETF is the company that invests money in it).
• Low "threshold" of entry (in ETF, the minimum contribution is limited to the cost of one share, in the mutual fund - the minimum amount is set by the sales agent).
• Diversification of assets.

ETFs differ from mutual funds by such parameters:

• High liquidity. ETF can be sold and bought during the day.
• The unit price of the mutual fund is calculated at the end of the day at the cost of net assets. The price of ETF changes every second.
• Units of mutual funds can not be bought for credit money. In ETF, you can use "leverage".
• UIFs can be traded in only one country, and shares on any exchange.
• On mutual funds, in contrast to ETF, commissions can be envisaged.

Market structure

The market of index funds is divided into primary (issue and redemption of shares) and secondary (circulation of shares). Only authorized participants have access to the primary market. They initiate the issue of shares, that is, they change money for shares, and conduct the reverse procedure - they repay the issue. The shares are redeemed by shares of 50,000 shares. Already in the secondary market, legal entities and individuals carry out transactions of purchase and sale of securities.

Legal framework

In the USA, index investment funds are regulated by the law of 1940, in which it was a question of open mutual funds. Although ETF does not perform a number of functions of mutual funds. Sometimes they are created in the form of an investment trust and then registered through the SEC.

European funds operate on the basis of the UCITS Directive adopted in 2009. Their characteristics are: openness for all investors, strict regulation of assets and disclosure procedures. At the same time, a fund opened in Luxembourg or Ireland can apply throughout the European Union.

Features of functioning

Let us consider in more detail how the exchange index funds are organized. First, the company rarely invests all funds received from the investor in assets. More often, 5-10% of the funds raised go to buy futures for assets that repeat the index. The remaining 90% of the company can dispose of it at its discretion. But it is obliged to return the investment on the first demand, taking into account the promised level of profitability. That is, ETF does not use its own funds.

Secondly, most of the funds do not own the Central Bank at all. They synthesize the behavior of the index. For this, an agreement is concluded with the bank on the exchange of cash flows. The credit institution undertakes to ensure the profitability of the index, for which it makes a profit from the assets of the fund. In such a virtual portfolio, 90% of the funds are invested. If the index brought more income than the portfolio of the Central Bank, the fund receives compensation from the bank. In the opposite situation, he himself pays the difference to the bank.

Banking risks

The danger is that index funds can not deviate from the index. Acquire all the shares that are included in the index, expensive. Each manager tries to generate his portfolio and does not always make an adequate replacement for the Central Bank. Earlier it was said that not all companies invest in shares. Some synthesize the index through bank deposits. Such investments in structure are similar to credit derivatives. They also contain an implicit risk. If the bank goes bankrupt, then 10% of the deposit will be immediately lost. The rest of the investor will be able to receive in the form of treasury obligations.

Price of issue

I.e. To create an ETF that repeats the RTS, you need to buy a futures on the index. Mutual index funds are cheaper than the assets they repeat. In the case of buying the asset would have to pay $ 3000, and when buying futures - $ 300. The remaining funds can be placed on the deposit.

The term of the futures is limited. For example, for RTS it is three months. That is, 4 times a year you have to transfer the position - change one futures to another. Index funds carry out this operation without investor participation. For conducting one transaction, the exchange charges 2 rubles. The fund needs to buy and sell futures. That is, the commission will be 4 r. Or 0.044% of the investment. For the year will have to give 0.17%. Only liquid assets are to be transferred . And not every index has a futures. That is, to repeat the position, one must buy several contracts at once or purchase securities on several exchanges. This increases the costs.

The balance of the futures owner's account changes daily depending on the price dynamics. Decrease in collateral below the established level leads to the fact that the investor must deposit the missing amount, otherwise his position will be forcibly closed at a loss.

The index fund strategy should also provide for different terms of contract execution. Against the backdrop of rising prices, a new contract will cost more.

Risks of investing

With the "right" formation of the fund, only those instruments that are included in the index should be purchased, and in the ratio that is inherent in the index. Problem one. The manager must acquire shares of companies for which no growth is expected in the next 2 years, only because they are present in the index. The second problem. If a company starts to grow and shows positive dynamics in the market, the manager can not purchase shares of this company more than their share in the index. Moreover, when the Central Bank rises in price and the company's share in the index exceeds the maximum value, the manager will have to sell these securities.

The index bond fund is unmanageable. To all other financial institutions, the methodology of risk management, limiting market presence and losses, is applied. In the case of the index fund, you see how the money decreases after the index decreases.

How to choose a fund

The first thing an investor should do is determine which index to invest in. Without competent technical and fundamental analysis , it will be difficult to deal with this issue. Index funds work with stocks, bonds, the commodity market and even real estate. The American PowerShares DB monitors the change in the dollar against the euro, the yen, the pound, the kroon and the franc. Based on the data obtained, the USDX index is formed. The United States Commodity Index tracks commodity futures, and iShares Global Real Estate copies the Cohen & Steers Global Realty index. A novice investor should better master the popular indices of the S & P 500 or the MICEX. It is easier for them to gather information and to compare statistics more easily.

When choosing a fund, you need to pay attention to two criteria: the size of the commission and compliance with the index. The larger the fund, the less likely it is for rapid bankruptcy. General information on Russian funds and mutual funds is available on the website of the National League of Managers. Although by law all funds are required to report regularly on the results of their work, after choosing a particular organization it is still worth checking the financial statements on the website of the fund itself.

It is also important to pay attention to the minimum deposit. Become a member of VTB - the MICEX Index "can be for 5000 rubles., And" BCS - MICEX "- for 50,000 rubles. Russian funds charge higher commissions than American ones. The amount of remuneration includes the commission of the fund, the depository, the auditor, the registrar, the appraiser and those expenses that are subject to reimbursement. Their maximum size is registered in the contract itself. For example, in "VTB" it is 3.7%. Only after a detailed analysis of all information should a decision be made to invest.