How do income funds make money?

How do income funds make money?

Bancomer Mutual Fund

On the stock exchanges, fixed-income securities, equities and derivatives are bought and sold. One of the main markets in the financial world is that of equities, usually company shares.

What is equities?  The main characteristic of equities is that the investment has no guaranteed return or return on invested capital. The profitability can be negative, so you can lose what you have invested. You could even lose your entire investment if you invest in a company that goes bankrupt.

Stocks are the best example of equities. As an investor, you buy shares and acquire rights such as dividend payments or information and voting rights. If a company generates profits, it can distribute them to shareholders. What is a share?  A share is a financial asset that represents part of a company’s share capital.

The sum of the shares represents the total value of a company. For example, if the company has 100 million shares and each share has a value of 2 euros, the company is worth 200 million euros. How do I acquire shares?  You can acquire shares in two ways:

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Fixed income is a type of investment that focuses on preserving capital and income. This investment is represented in securities such as government bonds, corporate bonds, certificates of deposit and money market funds. In addition, it has the characteristic that it offers the investor a steady stream of income, with less risk than stocks. When you buy or invest in stocks, you are buying a stake in a company. But when you buy fixed-income securities, you are lending money to the issuer.

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With the wide range of fixed income securities available, it is critical that as an investor you find the securities that meet your investment wants and needs. That means that if you want a high level of security for your investment, you should choose securities with a high credit rating. However, you receive a comparatively lower interest rate. On the other hand, in the case of fixed-income securities with a lower credit rating, there is the option of receiving a high interest rate, with a higher investment risk.

Banamex Investment Fund

Today, more and more people are asking themselves this question. The low interest rates maintained by the European Central Bank (ECB) to stimulate economies mean that savings products offer increasingly lower yields, in many cases to zero. Therefore, if it used to seem normal for a current account to offer the saver 5% with hardly any requirements, now it is practically impossible to make savings in the bank profitable.

Therefore, if the aim is not to put all the money in a single stock and not to spend too much time choosing a specific fund, there is also another alternative in the automated managers or roboadvisors, which rely on algorithms to invest in funds (usually indexed) and that serve investors who start from very little, since in some cases they can be hired from 500 euros. How much can be earned? The profitability of the investment will depend not only on the starting point, but also on the financial discipline followed month by month.

What are bbva mutual funds

The pandemic marks a turning point in the macro landscape and monetary policy with important implications for bonds. After a decade of low growth and inflation rates and zero/negative rates, the economy is experiencing a moment that can be summarized as follows:

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In this context, it is usual for central banks (CBs hereafter) to tighten financial conditions – tapering/reduction of bond purchases, rate hikes and even a balance sheet reduction in the case of hawkish/harder CBs like the Fed-. With exceptions such as China (macro slowdown & real estate crisis), Japan or Turkey, this is the predominant strategy (Fed, BoE, New Zealand, Norway, Singapore, Brazil…). The ECB is moving more slowly and sees it as premature to raise rates in 2022, but in March the PEPP – Pandemic Emergency Purchase Program – concludes.

We insist on keeping duration risk low and reduce exposure to sovereign bonds until we see attractive entry levels (higher IRRs). In credit, we focus on highly creditworthy companies with solid fundamentals (IG) and avoid HY (low credit quality and tight valuations).

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