How does an investment fund work?
As collective investment schemes, investment funds are much more than a loose collection of individual securities and a form of packaging investments together. One thing all funds have in common is the principle of ongoing management by a fund manager. Fund managers and fund providers act exclusively in the interests of the investors. The Swiss Federal Act on Collective Investment Schemes forms the relevant legal framework. The supervisory authority FINMA ensures that the investor protection enshrined in the law is also put into practice effectively.
Gathering together the investment assets of many individual investors on the one hand, and spreading these assets across a wide range of equities and/or bonds on the other are just two facets of an investment fund. In addition to this, the assets are professionally managed by fund managers, and switches made where necessary. Funds are thus much more than just a “package containing a random collection of individual securities”. What they all have in common is the principle of constant monitoring and management of the portfolios exclusively in the investors’ interests.
The equal treatment of investors as a fundamental principle
Each fund follows its own investment policy in accordance with its set aims. In the interests of providing a framework, this sets down the general investment focus and objective, and thus defines the investment instruments, regions, countries, sectors, and currencies in which the fund’s assets may be invested. The fund managers make their decisions within this investment framework, while also complying with the statutory provisions and in-house directives. The activities of a fund manager essentially entail investing the assets of the fund appropriately in line with the defined investment policy, seeking out suitable investment opportunities for new money, constantly monitoring these investments, and making continual adjustments in line with changes in the market situation. One crucial aspect here is that in the case of the traditional funds most widespread today, investors have no possibility of influencing the investment process. This also applies to major investors in a fund. Even if they hold a majority of the fund’s units, they have no say in such matters.
The old maxim “he who pays the piper calls the tune” therefore doesn’t apply in the case of funds. This is enshrined the Federal Act on Collective Investment Schemes (CISA), where one of the basic principles is the equal treatment of all unitholders. Fund investors therefore don’t have to be afraid that individual investors could ever be able to exert influence on the investment process because they have invested a large amount in the fund, and use this to their advantage.