Mutual investment funds (UIFs) – how to make money here

A unit investment fund (UIF) is a form of collective investment in which investors’ funds are pooled into a single fund managed by a professional management company. The purpose of mutual funds is to generate profit by investing in various assets (securities, real estate, commodities, etc.).

An investment unit is a financial instrument that evidences the right to own a share in the property of an investment fund.

Unlike shares or bonds, a unit does not have a fixed nominal value. Its price is based on the value of the net assets held by the fund divided by the number of units issued; this is called the calculated value. If the value of the fund’s assets increases, the calculated value of the unit increases.

The liquidity of units, i.e. the possibility of buying and selling them, depends on the category of the mutual fund. Funds are divided into:

• open – units can be purchased or redeemed daily at the calculated valueinterval – purchase and redemption are possible only on the designated dates;

• closed (ZPIF) – units may be purchased only at the stage of fund formation and redeemed at the time of fund closure. Sale on the stock exchange is allowed only if there are appropriate conditions;
• exchange-traded – units of such funds are traded on the stock exchange, which allows you to act as with any other securities, without the participation of the management company.

Before investing in a mutual fund, it is important to make sure that the fund is included in the State Register and that the management company has a licence. Closed-end funds may seem complicated for private investors, and only a limited number of such funds are available to unqualified investors.

How mutual funds work:

Investors contribute money to the fund by purchasing investment units. The value per unit depends on the total assets of the fund and the number of units issued.

The management company uses the fund’s assets to invest in various assets to earn profits. It makes decisions on the purchase and sale of assets, monitors the state of the fund and the distribution of profits among investors.

Investors receive profits in proportion to the number and value of units they own. Profits may be received in the form of dividends, growth in the value of the units or other forms of profit distribution.

How closed-end investment funds work

Investments in real estate, such as land and buildings, are only available through closed-end mutual funds (Closed-end mutual funds). Therefore, most of these funds are set up with the objective of acquiring properties for future rental.

The management company is responsible for the efficient management of the property to ensure a stable income. This income, such as rental income, is distributed to the fund participants, called rent, which is the interest of the investors.

All the necessary information about the fund is provided in a document known as the Mutual Fund Key Information Document. Here, investors can study the details of the fund’s strategy, potential risks, key investment results, fees and other facts.

When rental income or dividends come into the fund’s account, the estimated value of the units increases. After these proceeds are distributed to investors, the value of the units, all other things being equal, decreases.

It should be remembered that rents may not always be paid, for example, if the properties are not rented due to external factors or if the fund does not anticipate interim payments.

How and where to buy units of closed-end mutual funds?

Closed-end funds are called closed-end funds because of restrictions on the sale and purchase of units.

ZPIFs need to raise a ‘target amount of funds’ to purchase a particular property, so units are only available for purchase during the capital formation period. Once the required amount has been raised, the management company stops selling units and does not cancel them until the fund is completed.

In some cases, the fund rules may allow units to be traded on the secondary market if the investor decides to exit the fund early. However, under the law, the management company is not authorised to redeem units and investors must find buyers on their own, for example on the over-the-counter market.

The process of buying and selling units of ZPIFs can be complicated. A transaction is possible only if there is both a seller and a buyer, as well as a coincidence of price offers.

If the fund is registered on a stock exchange, the situation becomes simpler: an investor can apply for the sale of a unit through a broker. Units of various closed-end funds are already traded on the Moscow Exchange.

It is also worth considering the qualification level of investors and the value of units, as the Bank of Russia has set different requirements for qualified and unqualified investors.

Earnings on Mutual Funds

How to make money on mutual funds:

• Asset value growth. If the management company is successful in selecting assets to invest, the value of the units can rise, allowing investors to make a profit when the units are sold.
• Dividends and interest. Some assets in which the fund invests may earn dividends or interest. The management company distributes these earnings to investors.
• Professional management. The management company has experience and expertise in investing, which can help it make good decisions and earn profits.
• Risk diversification. By investing in different assets, the fund can reduce risk and increase the likelihood of returns.
• Transaction savings. The management company can transact the fund’s assets more efficiently than individual investors, which can result in transaction savings and increased returns.

How to evaluate the return on investment in mutual funds?

Evaluating the return on investment in mutual funds can involve several steps:

1. Examining a mutual fund’s return history. You can analyse the historical returns of the fund for previous periods. This will help in understanding how the fund has performed in different market conditions and what results it has achieved.
2. Comparison with other mutual funds. You can compare the returns of the selected mutual fund with other funds operating in the same industry or with different asset management strategies. This will allow you to assess how the selected fund stands out from others.
3. Analyse the composition of assets. It is important to examine what assets the mutual fund invests in. If the fund invests in a variety of instruments, this can reduce risk and increase potential returns.
4. Evaluate fees and expenses. It is important to consider the fees and expenses associated with managing the mutual fund’s assets. High fees can reduce the final return.
5. Considering the long-term outlook. Investing in mutual funds often involves a long-term perspective. It is important to evaluate how the fund has performed over long time periods.
6. Analysing the stability and reliability of the management company. It is worth examining the reputation and stability of the mutual fund management company. This will help to understand how reliable the fund is.
7. Comparison with alternative investments. You can compare the returns of a mutual fund with other alternative investments such as bank deposits, bonds or shares in individual companies. This will help in assessing the attractiveness of the fund in the context of alternatives.
8. Diversification Assessment. It is important to understand how diversified the mutual fund portfolio is. Asset diversity can reduce risk and increase potential returns.
9. Consultation with a financial advisor. If you are unsure of your knowledge and experience, it is recommended that you consult with a financial advisor. He or she can help you assess the risks and choose the most suitable mutual fund.
10. Researching ratings and reviews. You can study the ratings and reviews of mutual funds to understand how they are rated by other investors.

Pros of mutual funds:

• Professional management. Investors’ money is pooled and managed by a professional team. This allows you to get higher returns than if you manage your investments on your own.
• Risk diversification. Mutual funds allow you to spread your investments across different assets such as stocks, bonds, precious metals and others. This helps to reduce risks and increase the stability of the investment portfolio.
• Accessibility. Investments in mutual funds are available to a wide range of investors as one can buy units for any amount. This makes mutual funds attractive for novice investors.
• Transparency. Mutual funds are regulated by legislation and they are obliged to provide investors with information about their work. This allows you to control investment management and make informed decisions.
• Liquidity. Some mutual funds offer the possibility of quick withdrawal of funds. This allows investors to quickly dispose of their money.

Risks of mutual funds:

• Market volatility. The value of units can both rise and fall. This is due to fluctuations in the prices of assets included in the investment portfolio.
• Commissions. There are commissions charged for managing mutual funds, which can reduce the return on investment.
• Unprofessionalism of the management company. Even experienced managers can make mistakes that can lead to a decrease in the value of units.
• Withdrawal restrictions. Some mutual funds may have restrictions on withdrawals, which can make it difficult for investors to access their money.
• Conflict of interest. Management companies may be interested in maximising profits, which may lead to decisions that are not in the interests of investors.

It is important to remember that investing in mutual funds involves risks, and past performance does not guarantee future profits. Before making a decision to invest in mutual funds, you should carefully study information about the fund, the management company and the risks associated with investing.

What should you do if the management company violates your rights?

If you believe that the management company is violating your rights as a mutual fund investor, you can take the following steps:

1. Study the contract. Carefully read the terms and conditions of the UIF trust management agreement. Pay special attention to the sections concerning the rights and obligations of the parties, the procedure for resolving disputes, and the mechanism for withdrawing from the mutual fund.
2. Preserve evidence. If you experience a breach, retain any evidence that supports it. This could be letters, emails, payment receipts, etc.
3. Contact the management company. First, try to resolve the problem peacefully. Write a formal complaint to the management company stating specific violations and demanding that they be corrected.
4. Contact the regulatory authority. If the management company does not respond to your complaint or continues to violate your rights, contact the Central Bank of the Russian Federation (Bank of Russia), which supervises the activities of mutual fund management companies.
5. Go to court. If all the previous steps did not lead to the solution of the problem, you can go to court. To do this, you will need evidence of violations and grounds for filing a lawsuit.
6. Get expert advice. If you are unsure of your actions or do not know how best to proceed, contact a lawyer or financial adviser who will help you understand the situation and choose the most effective way to solve the problem.

It is important to remember that each case is different, and the specific actions you take may depend on many factors.

Taxes paid by shareholders and mutual funds

The main tax an investor should be aware of is personal income tax.

For all individuals who are tax residents of Russia, the personal income tax rate is fixed and does not depend on the type of mutual fund. It is 13%, but when the total income exceeds 5 million rubles, the rate increases to 15%. The taxable base here is the positive difference between the amount spent on the purchase of the unit and the final amount from its sale.

Mutual funds can also be taxed on their assets. These taxes are usually paid by the management companies and not by the investors themselves. In addition, if the fund is a rental fund, shareholders may receive regular distributions, such as from rental income. Tax must also be paid on these receipts, but the management of these obligations falls to the management company.

As for investors in ZPIFs, personal income tax must be paid in three cases: when redeeming fund units, when selling them on the secondary market and when receiving intermediate income, i.e. rent.