About fund investing
As a fund investor, you don’t need to worry about selecting investment targets, determining their relative weightings, or timing purchases and sales correctly.
An investment fund is a portfolio collectively owned by investors, where capital is pooled and managed by a portfolio manager or management team according to defined rules and strategy. Individual investors own units in the fund. The fund is divided into equal units, each granting the same rights to the assets within the fund. The number of units corresponds to the amount invested at the time of purchase and only changes if the investor buys or sells units.
The value of a fund unit after purchase is determined by the daily price, which is calculated based on the total value of the fund’s investments each day. A fund unit works much like a share: its value can rise or fall daily. Similarly to shares, fund units entitle the holder to participate in the fund company’s annual meeting and to any potential dividend from the fund.
Different Types of Funds
Investment funds are traditionally classified based on the choice of investment assets into equity funds, balanced funds, and bond funds. Over time, the range of funds has grown and evolved with their increasing popularity. Demand and investor preferences have also led to the creation of new types of funds alongside the traditional ones. Examples include fund-of-funds, hedge funds, index funds, thematic or ethical funds, sector-specific funds, and regional funds.
Equity funds offer high return potential, but in the short term, the value of fund units can fluctuate significantly. Their performance generally follows the development of the stock market. However, the risk is lower in an equity fund than in individual share investments because the fund diversifies investments across multiple holdings. Equity funds can also invest in different market regions or sectors, further reducing risk compared to single-stock investments.
The weighting of equity and fixed-income investments, as well as their permitted ranges, are defined in the fund’s rules, along with the geographical allocation of investments. In terms of risk level, balanced funds fall between bond funds and equity funds.
Short-term bond funds invest in interest-bearing instruments issued by banks, governments, or companies, with an interest rate risk typically under one year. Their goal is usually to outperform the three-month Euribor rate over the long term.
Long-term bond funds invest in long-duration fixed-income instruments with an interest rate risk of more than one year. Typical investments include government bonds, public sector bonds, and corporate bonds.
Bond funds are suitable for both short- and long-term investing. Short-term bond funds are a good alternative to deposits and other cash management solutions, while long-term bond funds are best suited for longer-term investments.
Fund of Funds: A fund of funds invests in other funds, providing investors with excellent diversification across multiple investment strategies and asset classes.
Hedge Funds: Hedge funds are special investment funds with more flexible rules than traditional funds. This flexibility allows them to pursue returns that differ from conventional funds. Hedge funds often aim to achieve positive returns regardless of market conditions, making them an alternative and a hedge against traditional investments. There are many types of hedge funds, and their risk levels can vary significantly.
A Units: Holders of A units receive an annual dividend (income) from the fund according to its rules. The dividend is paid in cash to the client’s account.
B Units: Holders of B units do not receive dividends; instead, all returns remain in the fund and are realised through an increase in value (growth). For this reason, the values of A and B units differ, even though the underlying investments are identical.
Our fund range also includes I units, which are designed for institutional clients.
How Do I Choose a Fund?
Set your investment goals
Before choosing an investment fund, it’s important to clarify what your investment goals are. Your financial situation, age, family circumstances, and so on play a significant role in determining suitable investment options. The higher the return you aim for, the greater the level of risk you must also be prepared to tolerate.
Define your investment horizon
Your goals also help determine the length of your investment horizon. If the investment period is short, it is sensible to choose funds where the risk of losing capital is low. For short-term investors, low-risk bond funds are usually the most suitable option. If the investment period is longer, it is reasonable to take on slightly more risk to achieve better returns. In such cases, funds can be invested, for example, in equity funds. If the investment period is uncertain, it may be worth considering long-term bond funds or mixed funds.
Choose investments that match your risk appetite
Risk refers to fluctuations in the value of an investment. Due to movements in equity and bond markets, there is a possibility that your investment may not generate a return, and you could even lose part of your capital. Bond funds generally experience smaller value fluctuations than equity funds, but lower risk also means aiming for lower returns. Investors who are comfortable with significant annual fluctuations may prefer equity funds, whose returns and risks are based on the performance of share prices in the relevant market areas.
Investment risks
As with all investing, fund investments also carry risks. Due to fluctuations in equity and bond markets, your investment may not generate a return, and you could even lose part of your capital. Depending on the investment, the level of risk can be very low or quite significant. Bond markets generally involve lower risk than equity markets, but there is no such thing as a completely risk-free investment. As an investor, it’s important to be aware of the risk level of your chosen investment and to understand your own risk tolerance.
Bond funds are suitable for investors seeking steady value growth with moderate risk. They work well for both short- and long-term investing. Bond funds generally carry a lower level of risk, but the expected return is also lower compared to equity funds.
A key principle of investing in funds is spreading the risks associated with investment activities. Legislation sets rules for investment funds on how assets must be diversified across different investments and limits how much can be allocated to any single investment. These diversification requirements do not apply to special investment funds.
All investment funds share one common feature: the value of fund units can rise or fall. Past performance is not a guarantee of future returns. When redeeming fund units, an investor may receive less than they originally invested. Investment funds are not covered by the Investor Compensation Fund or deposit protection schemes.
Counterparty risk refers to the potential loss to the fund if the counterparty to a transaction fails to meet its obligations before the cash flow related to the transaction is fully settled. Bond investments carry counterparty risk if the issuer of the bond is unable to repay the debt as agreed. Counterparty risk also applies to non-standardised derivative contracts entered into by the fund. This risk is mitigated through investment restrictions and requirements imposed on counterparties.
Operational risk refers to the risk faced by a fund due to inadequate internal processes, or issues related to people, systems, external events, and technology. It also includes legal and contractual risks, as well as risks arising from trading, settlement, and valuation procedures carried out on behalf of the fund. If these risks materialise, they can have a significant negative impact on the value and returns of the fund’s units. Operational risks are managed through backup arrangements, contingency systems, and business continuity planning.
The fund management company monitors the amount of liquid assets in the funds to ensure each fund maintains sufficient liquidity. In addition, stress tests are carried out to assess liquidity risk. The redemption of fund units may take longer than usual, and in certain situations, redemptions can be suspended.
The fund management company holds liability insurance in accordance with Chapter 6, Section 4 of the Alternative Investment Fund Managers Act. This insurance covers damages for which the alternative investment fund manager is legally responsible under the Act.
Taxation of fund investments in Finland
Tax implications of fund investments arise when money is returned to you from the fund—such as when you redeem units that have generated a positive return or when income is paid from A-units.
Capital gains from fund investments or income paid based on distribution units are considered capital income, currently taxed at 30–33%. The fund management company automatically withholds tax on income payments as a prepayment. It also reports the acquisition cost of redeemed units to the tax authorities, so as an investor you usually only need to check the amount of capital gains on your pre-filled tax return.
If you sell fund units for less than their purchase price, you incur a loss. No tax is levied on this, but you can deduct the loss from any potential gains.
The fund itself is not subject to income tax, so it can trade securities without tax consequences.
The above tax information applies to investments by Finnish private individuals in funds managed by SEB Fund Management Company Finland Ltd and is based on SEB’s understanding of current tax regulations. However, you should always confirm the applicable legislation with the tax authorities.