Investment funds are one of the most common types of investment that people use. If you too want to appreciate your money, you may be thinking right now about where and how to invest. We have therefore prepared a detailed overview of investment funds and how investment companies work or who protects investors. Investment funds are subject to strict legal regulation.
It is a collective investment vehicle that allows us all to manage our invested money effectively. An investment fund is a type of financial instrument that allows investors to pool their money and invest it in different assets – stocks, bonds, real estate or commodities. An investment fund is also a legal entity, most often a joint stock company.
The advantage of this type of investment is therefore the diversification of the portfolio, as well as the professional management by fund managers who have the expertise to warn you in good time of potential risks and advise you on how to spread your investment.
In addition to the fund manager, there is also a fund administrator who takes care of valuation and overall trading management. Then the company’s board of directors, or trustees, who are tasked with protecting the assets and making sure the investment fund complies with all laws. And then the shareholders themselves, the ones who own the assets in the fund, are an integral part of it.
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The most commonly used types are the equity fund and the mutual fund. Equity funds then specialise only in investing in shares of different companies. They are generally riskier because there is not as much portfolio diversification as with investment funds. However, the higher risk is offset by potentially higher returns.
Mutual funds are a subset of investment funds. Mutual funds are managed by investment companies and do not have their own legal personality. Investors place their funds in them in exchange for units. The holders of the units are then called unit-holders. Mutual funds can again invest in different assets such as shares, bonds, currencies or commodities.
The main legislation governing investment funds in the Czech Republic is the Investment Companies and Investment Funds Act. This Act harmonises Czech legislation with European collective investment regulations such as the UCITS and AIFMD. The legal relations between investors and fund managers would also be found in the Civil Code. Tax laws then regulate how the income from investment funds should be taxed.
The legal regulation of investment funds, mutual funds and investment companies is complex and constantly evolving. Changes are expected in the regulation of alternative investment funds and the strengthening of retail investor protection. In addition, the European Union is preparing further amendments to the UCITS and AIFMD directives, which may also have an impact on the Czech market.
Tip: Not sure how to get started with investing in stocks? We have prepared a detailed article on what stocks are, how to understand the different terms and what to look out for.
If someone decides to set up an investment fund, the first thing that must happen is that the investment plan must be approved by the Czech National Bank. The founders of the fund must submit an application for registration of the fund to the Czech National Bank, providing information on the investment strategy, the type of fund and its organisational structure.
The second step is the appointment of the investment fund manager. Every investment fund must have one. This can be either the investment company itself or an external manager. The manager provides investment management and administrative administration of the fund, and its activities are supervised by the Czech National Bank.
A depositary must then be appointed. Every investment fund must have one and it can be a bank or other financial institution approved by the Czech National Bank. The depositary is responsible for controlling the management of the fund, managing the assets and protecting the interests of investors. It is responsible for ensuring that all transactions are carried out in accordance with the fund’s statutes and applicable legislation.
Then comes the publication of the fund’s statutes. This important document contains details of the fund’s investment strategy, its objectives, risk profile, fee structure and other key aspects of the fund’s operation. The fund’s statutes must be made publicly available and changes to them must always be approved by the Czech National Bank.
Finally, it is sufficient to attract investors and start operations. The fund can do this once all legal requirements have been met.
The main institution that supervises investment companies is the Czech National Bank. Its task is to ensure the protection of investors and it has several mechanisms at its disposal to do so:
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