Investment funds make it possible to access different markets without selecting and managing each asset individually. However, the variety can be overwhelming: money market funds, fixed income funds, equity funds, mixed funds, index funds, thematic funds, guaranteed funds…
The first idea to keep in mind is that these categories are not mutually exclusive. The same fund can be, for example, an equity fund, global, index-based, sustainable and accumulating. Each label describes a different feature.
That is why choosing well is not about looking for the “best fund”, but about understanding what it contains, what risks it assumes, how much it costs and what role it will play within the portfolio.
What is an investment fund?
A fund pools the money of many investors, known as unitholders, and invests it collectively according to a defined policy.
The assets are divided into units, whose price is expressed through the net asset value. When an investor enters the fund, they subscribe for units; when they want to exit, they request their redemption, subject to the established deadlines and conditions.
A management company administers the assets in accordance with the policy set out in the prospectus. This management can be active, if it selects investments according to its own criteria, or passive, if it seeks to replicate the performance of an index.
Funds differ according to the assets they invest in, the strategy they follow, their geographical scope, risk level, liquidity, costs and treatment of returns.
Funds according to the assets they invest in
Money market funds
They invest mainly in highly liquid instruments with very short maturities.
They usually present fewer fluctuations than other funds and can be used for near-term goals or to manage liquidity temporarily. However, they are not bank deposits and do not guarantee capital preservation.
Fixed income funds
They invest in public or corporate debt. Their risk depends on factors such as:
- the issuer’s solvency;
- the maturity of the bonds;
- sensitivity to interest rates;
- currency;
- and credit quality.
The term fixed income does not mean that the fund’s return is fixed. Its value may fall if rates rise, issuers’ solvency deteriorates or market conditions change.
Equity funds
They invest mainly in shares and are usually used for long-term growth-oriented goals.
They can experience significant fluctuations and prolonged losses. In addition, they do not all present the same level of risk: a broadly diversified global fund has a different exposure from one focused on small companies in a single country.
Assuming higher volatility may increase return potential, but it does not guarantee a superior result.
Mixed funds
They combine fixed income and equities within the same vehicle.
Their risk depends on the weight of each asset class, the limits established in the investment policy and the flexibility of the manager. The “mixed” label does not automatically imply a balanced or conservative portfolio.
What are real estate investment funds?
Real estate investment funds invest mainly in urban properties to operate them through rental.
They should not be confused with other forms of exposure to the sector, such as:
- funds that buy shares in real estate companies;
- listed funds tracking real estate indices;
- long-term investment vehicles;
- or crowdfunding platforms.
Urbanitae, for example, is not a real estate fund, but a crowdfunding service provider. On its platform, each investor decides which specific debt or equity projects to participate in. They do not hand over their capital to a manager to allocate it within a common fund.
This legal and economic difference is important: each alternative offers a different combination of diversification, liquidity, management and risk.
Active management, index management and exchange-traded funds
Actively managed funds make asset selection and allocation decisions according to the defined policy. Some try to outperform a benchmark index; others seek to control risk, preserve capital or generate income.
To assess their results, it is worth comparing:
- returns after fees;
- the risk assumed;
- performance versus their benchmark;
- and sufficiently long periods.
Index funds follow a passive strategy and seek to replicate the performance of an index. The result usually deviates slightly due to costs and what is known as tracking error.
The fact that a fund is index-based does not guarantee that it is broadly diversified. It may replicate a sector, a region or a concentrated basket.
Nor should a traditional index fund be confused with an exchange-traded fund or ETF. Both may track indices, but:
- the traditional fund is subscribed and redeemed at net asset value;
- the ETF trades on the stock exchange during the session;
- and there may be operational, tax and cost differences.
Global, regional, sector and thematic funds
Geography and specialisation are dimensions separate from the management style.
A fund may invest:
- worldwide;
- in a specific region;
- in emerging markets;
- in a sector;
- or in a particular theme.
Thematic funds focus on trends such as technology, healthcare or the energy transition. This specialisation can amplify both gains and losses and does not replace broadly diversified exposure.
There are also funds that incorporate environmental, social and governance criteria — ESG. However, the sustainable label may correspond to very different methods, such as exclusions, company selection, risk integration or impact investing.
That is why it is advisable to review the actual policy and not rely only on the commercial name.
ELTIFs and other long-term funds
European long-term investment funds — ELTIFs — are a regulatory category designed to channel capital into assets such as infrastructure, unlisted companies, private debt or certain real assets.
They can offer access to investments that are less present in conventional funds, but they also involve:
- lower liquidity;
- long investment periods;
- greater complexity;
- and more limited exit conditions.
The European reform approved in 2023 made it easier to market them to retail investors, but that does not mean all ELTIFs have low minimum amounts or can be redeemed easily.
Each vehicle must be analysed individually.
Guaranteed funds and target-date funds
Guaranteed funds may secure all or part of the capital on a specific date and under certain conditions.
The guarantee may not apply if the investor redeems before maturity. In addition, some funds only guarantee the capital and limit the potential return.
Target-date funds, common in retirement strategies, usually reduce their risk level progressively as a given date approaches.
They should not be confused with target maturity funds, which normally build a bond portfolio with maturity dates close to a specific year.
Accumulating and distributing funds
Accumulating funds reinvest within the vehicle itself the dividends, interest or other income obtained.
Distributing funds pay those returns to the investor periodically.
Distribution does not represent additional return: when income is distributed, the fund’s value adjusts. The choice depends on whether the aim is growth through reinvestment or generating regular cash flows.
It may also have different tax consequences, so it is worth reviewing the personal situation and applicable regulations.
What to review before choosing a fund
Before investing, the starting point should not be the return over the last year, but the role the fund will play within the portfolio.
A useful checklist would include:
- Goal and timeframe. What is expected to be achieved and when the money will be needed.
- Investment policy. Which assets, countries and sectors it actually invests in.
- Risks. Volatility, credit, currency, concentration and liquidity.
- Costs. Management fee, depositary fee, subscription fee, redemption fee and other expenses.
- Unit class. This may change fees, the entry minimum, currency or income distribution.
- Liquidity. Redemption periods and possible restrictions or penalties.
- Benchmark. How it behaves compared with its index or category, always considering the risk assumed.
- Taxation. In Spain, certain transfers between funds may benefit from tax deferral when the requirements are met, something that does not generally apply to ETFs.
The fund’s key documentation brings together much of this information and should be reviewed before investing.
The name of the fund matters less than what it contains
Choosing a fund is not about selecting from a list of labels. Two funds in the same category may have very different risks, costs and behaviour. Likewise, a single fund may belong to several classifications at the same time.
The decision should start with the investor’s goal and end with the analysis of the specific product. What matters is understanding which assets it contains, what risks it assumes, how much it costs and what role it plays within the portfolio.
