Academic journal article Global Economic Observer

Investment Funds Industry in Romania

Academic journal article Global Economic Observer

Investment Funds Industry in Romania

Article excerpt


A mutual investment fund is a diversified portofolio of stocks, bonds, or other securities run by an investment management company. Funds must register with the a public authority (CNVM) and must comply with specific requirements. These regulations do not guarantee that a fund will be a profitable entity but they do provide certain safeguards.

The role of a mutual fund is to make investing activity a simple and cheap one. A very important advantage is that money is managed professionally. A specialized team takes buying or/and selling decisions, based on thorough detailed analysis. In addition, as market conditions change, the fund management is restructuring the portfolio so that financial objectives are achieved. The alternative would be to take these decisions by oneself, which would require an extensive knowledge of finance field and of capital market (Comescu V., Cre^oiu Gh., Bucur L, 2007).

Portfolio diversification is another benefit offered by mutual funds. These make investments in various stocks, and each fund investor owns a percentage of all the investments, according to the number of units held. Diversification of investments is one of the basic rules of investment as it leads to risk mitigation.

For example, a fund invests the same amount in the two kinds of stocks, which have different trends: a decrease of 10% and another 10% increase. Portfolio diversification causes the fund to lose nothing. Conversely, if it would have invested only in the first stock it would have lost 10%. On the other hand, if he would have invested only in the second stock it would have gained 10%, but the risk assumed would have been higher.

Also, an important advantage of investments in mutual funds is the possibility to withdraw money anytime. Mutual funds are required by law to accept anytime to redeem securities issued. In this case, it is paid a withdrawal fee which depends on the period since the time of purchase of units. If the period is several months, withdrawal fee may be up to 10%. Subsequently, its value decreases and after 12 months many funds do not charge any commission. By this policy fund managing companies encourage investments on medium and long term.

The same idea is also designing tax system. If money is stored for more than one year then the tax due to the state is only 1% of income, compared to 16% otherwise. Investments in mutual funds are not guaranteed by the state and mutual funds are not participating in the deposit insurance fund. Investing in mutual funds is therefore more risky in this regard than a bank deposit of an individual with a value within guaranteed limits. There is the risk that investing in a mutual fund not to have the expected performance and even to lose the amount originally invested, partially or totally.

By making an investment portfolio, mutual funds reduce but not eliminate the market risk consisting of fluctuations in value of financial instruments which had been invested in. It also can not be overlooked the legal risk through the potential occurrence of legal constraints that lead to decreasing the value of units or suspend their redemption by the fund. Depending on the chosen time horizon it can be established then the risk which can be assumed. Usually, if the period is longer (over five years) a person may assume major risks while short-term investments require a more prudent approach. A higher risk however offers the opportunity to obtain a higher yield. All mutual funds are risky and do not guarantee recovery of the amount invested. From this perspective, the choice should take into account the sensitivity of the individual to the risks.

1. Investments funds in Romania

After a troubled period in the 90's when investment funds has passed through many difficulties, in the next decade the progress of capital market was quite impressive. On legislative side we have the 297/2004 Law regarding the Collective Investment Institutions (CII) which divided them into two categories: investment funds and investment societies. …

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