Fund investing in 2022: How and which ETFs to buy for long-term investments?

John James
August 10, 2021
What is Fund Investing? Would you like to invest in funds? Investors can quickly increase their wealth by investing in ETFs without any great knowledge of the stock market.
fund-investing

Would you like to invest in funds? Investors can quickly increase their wealth by investing in ETFs without any great knowledge of the stock market.

In some cases, the investment is made with a higher return than the index and constant liquidity.

However, funds differ in many ways and perform differently, sometimes worse than the benchmark index.

But which funds do you best invest in? This article answers these and other questions.

Table of Contents

What is a fund?

A fund is a custody account with an accumulation of exchange-traded securities. The diversification of these securities makes this fund more resistant to the individual securities’ volatility, i.e. the fluctuations in value.

With funds, you always invest in several stock market values. Many funds invest in stocks because they can generate more returns, and there is a wide range of options. In addition, stocks are very liquid stocks. 

However, there are also funds in bonds, investing, ie bonds, or real estate or commodities. A mixed form, called a mixed fund, is also possible.

Apart from that, there are many other categories in which funds differ: There are funds that invest in specific regions or industries, closed and open funds, active and passive funds and others. 

Which fund you invest in depends on your willingness to take risks and your expected return. Each fund also incurs different costs that gnaw at the return.

And a fund is by no means a guarantee of eternal growth: Funds, like individual securities, are affected by the market’s volatility and can fall, sometimes dramatically. 

If part of a fund’s custody account consists of foreign values, there is also a currency risk: If the respective currency falls, a loss is incurred if the foreign currency is exchanged for euros.

Investing in funds is therefore also a risky affair. Those who want to invest in funds have a wide range of options: with a passive fund, also known as an ETF, you can save a lot of costs.

ETF vs Fund differences explained

An ETF, or exchange-traded fund, is a passive fund, so far so good. But how exactly do ETFs differ from other (active) funds?

Active funds have one or more fund managers who have to act actively in order to run the fund.

This means that you have to analyze the market independently and make investments yourself so that the highest-yielding securities are in the portfolio at all times. 

However, these fund managers have to be paid. They take their payment from the fund they manage. The more successful the fund, the more expensive it is usually. In addition, there are a number of other costs.

Access to such investment funds is often only possible for financially strong investors.

There are no fund managers with ETFs, i.e. passive funds, at least not in a conventional way.  As a rule, software controls the investments and invests according to certain specifications.

fund-investing

However, there are no strict definitions for this. More important is the fact that ETFs can be freely traded on the stock exchange, much like stocks.

The classic is the index fund, which invests in all stocks included in a leading index such as the DAX. This saves costs, and the fund achieves the same return as the index. 

Other ETF forms are also possible, but no fund manager decides on the investments. Often these act according to complex formulas and empirical values and their intuitions, while the software makes primitive decisions that replicate the success of the market or the sector. 

The premise of actively managed funds is ( supposedly ) higher returns. The goal of every fund manager is to achieve an above-average return that an ETF cannot achieve.

However, the past has shown that actively managed funds perform just as well on average as ETFs, and in some situations, they even performed worse.

The best funds for 2021

Franklin Technology Fund A (acc)

The equity fund with the highest yield is Franklin Technology Fund A (acc) USD, which rose by 84 percent in one year and already performed above average before the corona pandemic.

The annual average yield amounts to 10 years stretched 18 percent, resulting in a fantastic return is. 

Two-thirds of the portfolio consists of technology stocks, as the name suggests. However, it should also be noted that over 80 percent of the money is in American stocks, so there is an increased risk of clusters

Therefore, it is not surprising that the US dollar is the current currency, which creates a currency risk. With fees of 1.82 percent, the fund is expensive, but the above-average return makes this fund a very interesting investment.

Since the fund has been around for 21 years and has a volume of over 7 billion US dollars, it can also be assumed that the fund will not close anytime soon. 

Morgan Stanley Global Opportunity Fund

The Morgan Stanley Global Opportunity Fund (USD) A takes second place in this ranking of equity funds. Here the annual average return is 17 percent.

In addition to the high running costs of 1.84 percent, there is an issue surcharge of 2.88 percent.

The Morgan Stanley Fund invests in growth stocks around the world, with the American continent again being overrepresented at 62 percent. The fund volume is 17 billion US dollars.

ING Global Index Portfolio Defensive A Cap

However, there are not only equity funds but also bond funds and mixed funds. The bond fund with the highest yield is the ING Global Index Portfolio Defensive A Cap, which achieves an average annual return of 4.4 percent.

However, this fund was only imposed almost 3 years ago

One should also bear in mind that pensions, i.e. interest values, generally generate less returns and are therefore more likely to be held as a stabilizing position. Everyone should know that there is hardly any interest (on the account). That is why an annual average return of 4.4 percent is an above-average return for a bond fund. 

fund-investing

ARERO, the world fund

ARERO, the world fund, is a combination of equity funds and bond funds, called mixed funds. This consists of 57 percent shares and 35 percent bonds.

The annual average return, extrapolated over 10 years, is a little less than 6 percent. In fact, 6 percent is also considered average growth on the stock market. Thus, the aim of the fund is to generate a particularly favorable risk-return ratio.

Flossbach von Storch SICAV – Multiple Opportunities R

The Flossbach von Storch SICAV – Multiple Opportunities R mixed fund achieves a better annual average return of 8.7 percent. Although it is a mixed fund, 76 percent of the fund’s volume is in stocks. 

The investment focus is more broadly diversified than the previous funds: 21 percent of the money is invested in consumer goods companies, 15 percent goes to the communications industry, 14 percent goes to the health sector, and 11 percent goes to industrial companies. 

The costs of this fund are also comparatively high: In addition to the annual performance fee, there are other ongoing costs of 1.6 percent and an administration fee of 1.53 percent.

The best equity funds

SurnameAlignmentInvest inMorningstar Rating
Franklin Technology Fundtechnologyshares★★★★★
Morgan Stanley Global OpportunityInternationalshares★★★★★
green benefit Global Impact FundEcology/sustainabilityshares★★★★★
ÖkoWorld Climate CEcology / sustainabilityshares★★★★★
BIT Global Internet Leaders 30InternationalsharesNo rating

The best pension funds

SurnameAlignmentInvest inMorningstar Rating
ING Global Index Portfolio DefensiveMostly pension fundsETFs & index funds★★★★★
BlackRock Global FundsEUR / EUR hedgedBonds★★★★★
Flossbach Bond Opportunities REUR / companyBonds★★★★★
DWS Qi Extra BondEUR / EUR hedgedBonds★★★★ ☆

The best-mixed funds

SurnameAlignmentInvest inMorningstar Rating
ARERO – The World FundFund of fundsEquity + bond funds★★★★ ☆
Flossbach Multiple Opportunities R.Mixed fundsPrimarily stocks/world.★★★★★
Flossbach Multiple Opportunities IIMixed fundsPrimarily stocks/world★★★★★
Amundi Ethics FundMixed fundsPrimary bonds/world★★★★★
GlobalPortfolioOne (RT)Mixed fundsPrimarily stocks/worldNo rating
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Investing in funds in three steps with TradeATF

The fee-free online broker TradeATF is ideal for investments. Here investors can easily invest in funds.

The following step-by-step guide explains and makes investing in funds on TradeATF easier:

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Step 1: Open an account with an online broker

At the beginning, of course, you first have to register before you can invest in funds.

In addition to the usual personal information, you will also be asked to provide information about your salary, investment experience and risk tolerance.

For security reasons, TradeATF denies investors access to the Copytrader or certain functions if they do not have a certain investment experience and a corresponding willingness to take risks.

Since capital gains tax of 25 percent is levied on exchange rate gains, you will also be asked for your tax number when registering.

Otherwise, the registration process is straightforward and only takes a few minutes.

Step 2: transfer money

After you have successfully registered, you can also transfer money directly to your newly set up TradeATF Depot. Again, TradeATF does not charge any fees for the transfers.

As a rule, the money ends up in your depository in a short time. You can deposit money via the dashboard, which appears immediately after registration.

In general, you have several options for transferring money: You can make a classic transfer or pay with a credit card, but you can also pay with PayPal or GiroPay.

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Step 3: invest in funds.

Investors on TradeATF have recently been able to invest in ETFs, i.e. in passive funds, which are generally relatively inexpensive. There is also no order fee.

This is the most effective way of investing under fair price conditions. To do this, simply enter the name of the fund in the search field and click on the options proposed to you.

With every product, you have the possibility to view statistical data and the historical development. In this way, you can see whether the fund in question is currently trending or not.

Once you have made your decision, click on the respective investment fund and on the “ Trade” button. You will notice that a wide variety of information is displayed over and over again for the various assets.

So this shows why TradeATF is also called a social trader.

Fund investment is most likely worthwhile if you invest long-term. In the trading window, you can choose how many shares of the product you want to buy.

You can also enter some buy options and order commands to protect yourself. Finally, the fund investment is done.

Types of Fund

There are innumerable funds in the world. As mentioned before, there are tons of categories that contribute to the enormous number.

ETFs can be further subdivided into physically replicating and synthetic replicating ETFs. What exactly does that mean?

Physically

Physically replicating ETFs form an index, for example, the DAX with the same values ​​that are contained in the DAX.

In the case of leading indices, this is not yet a problem, as all the stocks they contain are extremely liquid. The leading index contains the largest and most successful individual stocks of the respective country, which are usually always liquid.

Problems arise when an ETF is supposed to track an index (not a leading index) that contains illiquid stocks. If an illiquid asset is excluded from the index, the ETF must automatically sell its shares in that stock.

In illiquid markets, there is no demand for these values, which is why the ETF remains in its equity position (at least temporarily).

The same problem can also arise in reverse if a new illiquid value is added to an index. The corresponding ETF now has to inject the same value into its portfolio in proportion to the index.

To avoid the problems that arise from this, there are synthetic replicating ETFs.

Synthetic

Synthetically replicating ETFs also replicate an index one-to-one . However, this is achieved with all stock market values ​​in the form of real shares and alternative forms of investment.

An ETF on an index could, for example, physically replicate 90 percent of the values ​​in an index and replace the remaining 10 percent of the remaining illiquid values ​​with other stock market values, ​​which, when added together, nevertheless replicate the index one to one

The remaining 10 percent of the values ​​are replicated, for example, through derivatives with a financial partner, which enables the index to be replicated without having to take over all the values ​​in its portfolio.

This means that the ETF, although it partly contains different values ​​(for example, CFDs instead of stocks ) than the index, still tracks the exact course of this index. 

Such replication is called a swap. The swap is, therefore 10 percent in this case. Synthetically replicating ETFs are particularly suitable for niche markets with illiquid values. Not only stocks are replicated this way.

In the past, however, swap-based ETFs have already led to major problems, so that the course of an index could not be precisely replicated.

In such cases, the swaps would default. This default risk is also called counterparty risk, which means that the respective financial partner can not guarantee the replication of the index.

This means that in the worst-case scenario, the index cannot be reproduced exactly. This error in the replication of the index is also called tracking error.

Accumulating

When introducing the most profitable funds in the previous section, a rough distinction was made between distributing and accumulating funds.

The compound interest effect allows the accumulating fund to grow faster but does not generate any dividends. But how exactly does it all work?

An accumulating fund or ETF reinvests all interest and dividends on the values ​​it contains. Many stocks repay dividends at least once during the year.

Interest-bearing securities such as bonds or certificates generate interest, which is regularly distributed to the holder. 

Exactly these undistributed payments are from an accumulation fund retained and reinvested in the same values of the Fund.

This is where the compound interest effect comes into play: This effect causes the curve of the accumulating fund to rise exponentially and outperform the slope of the distributing fund. 

That is also logical because a fund in which more money is regularly invested naturally also grows faster. Albert Einstein once called the compound interest effect the 8th wonder of the world.

So if an investment fund wants stronger grows (especially in the future), which should an accumulating fund besparen and in the best case, using ETF savings plan monthly new amounts in the funds invest.

This makes a lot of sense, especially for old-age provision, because an exponential growth curve increases more and more, especially towards the end. 

Distributing

However, distributing funds also have their justification. These distribute the amounts achieved to the investors.

Although the price-performance suffers as a result, on the other hand, it results in a kind of passive income, as the fund regularly transfers amounts of money to the investors’ custody account.

But be careful: unfortunately, capital gains tax and church tax are always due on this income, which is why part of the money is lost to the tax authorities. 

This type of fund is suitable for investors who value passive cash flow. For example, some digital nomads and freelancers try to generate a passive income with this type of fund, among other things, which gives them a relaxed work-life balance.

It should be noted, however, that these dividend yields are not particularly high if you do not have a significant investment amount. Added to this are the regular costs that reduce income.

Normal investors will not be able to make a living from it, but it may cover bills in some cases.

Many funds on leading indices of other countries, such as the French CAC 40 and the Japanese Nikkei 225 , are available in distribution variants.

Investing in funds: pros and cons

Funds, whether accumulating, distributing, synthetically replicating, or physically replicating, are a good way of holding and growing wealth .

What is special about this form of investment is that you can spread your risk very broadly and do not have to deal with the selection of stocks and bonds.

Nevertheless, funds of all types are associated with a certain level of risk: the higher the prospect of returns, the higher the risk.

  • Elegant form of investment
  • Professional fund management
  • Invest in entire industries
  • Automatic spreading of the plant
  • Risk remains
  • Income is subject to capital gains tax
  • Increased risks with synthetic funds

Every investor can read about the risk of a fund as well as its costs and investment focus in the so-called key investor information.

This is a short 2-3-page document that contains the most important information about the selected system. This document is required by law, which is why every publicly tradable installation has such a document.

In addition to counterparty risk and ongoing charges, you will have to pay a capital gains tax of 25 percent on your profits from your fund, regardless of which fund you invest in.

Although the risk with funds is broadly diversified, you should find out more about the fund and the respective industry (s), as this can lead to cluster risks.

For example, if you had bought a fund with a lot of aviation companies or tourism-related assets a year ago, it would have fallen into the basement during the corona pandemic.

It is therefore advisable to further diversify the risk by buying several funds in different sectors.

fund-investing

Fund as a long-term investment & retirement provision

The low birth rate will create a major problem for all people in the future: the statutory pension will hardly be sufficient to finance a dignified standard of living.

A private pension is therefore highly recommended.  As already mentioned, accumulation funds lead to an exponentially rising price trend in the future (as long as the fund does not go bankrupt or permanently decline due to other events).

Therefore, the idea is to use such funds for old-age provision to have enough money later and not perish in old-age poverty

Henceforth your money amount by the inflation on your account shrink. Therefore, investing the money is always better than an interest-free savings account. Alternatively, you can save yourself a lifelong guaranteed private pension with the help of funds with a private insurance company.

It should then be noted that your pension depends on the performance of the fund (s). When making long-term investments in funds, it should also be noted that the point in time of a one-off investment can have a decisive impact on returns.

However, especially with savings plans, the higher your private pension will be, the earlier you start.

A long-term fund should also incur as few costs as possible, as these gnaw away at your long-term return. Small cattle also make crap.

Most important key figures for fund investment

For all funds, there are always special key figures with which a fund can be rated. Let’s take a look at this data.

Beta factor

First of all, there is the beta factor. This provides information about the risk of the fund compared to a reference value. The higher the beta factor, the higher the risk of the fund.

On the other hand, funds with a low beta factor perform worse in times of an economic boom and generate less returns.

Sharp ratio

The Sharp Ratio is used when you have a choice between two funds with different returns. This indicates the relationship between excess return and risk, i.e. volatility. 

Jensen’s Alpha

The Jensens Alpha is a key figure that is suitable for comparison with other funds. The indicator shows whether the fund performed better or worse than a comparable investment product. The higher the Jensens Alpha, the better.

Information ratio

The information ratio evaluates the fund management of a fund. The higher this value, the better for management and the fund. This means that the fund deviates from the comparison market. 

Treynor measure

A Treynor measure indicates the ratio of the Sharp ratio to the beta factor. The same applies here: the higher, the better.

Which funds should you invest in? – Fund portfolio for beginners

In order to be able to present a suitable fund portfolio for beginners, we should first determine a few things. We assume an investor with a medium risk tolerance and a long-term investment goal for the following portfolio.

Exactly in which funds you invest is up to you. The following portfolio is just an example.

MSCI World Index (CH0001693230)

First, there is the MSCI World Index (CH0001693230), which contains various stocks from different countries, especially with savings plans with the USA as the main investment focusThis fund is particularly well suited for long-term investors, as it has historically projected an average annual return of 7 percent over 15 years.

Here we have given a good driver of the global economy, which should form a strong basis. This fund should make up 25 percent of your portfolio.

Deka-ImmobilienEuropa Fund (DE0009809566)

A real estate fund should be listed here as the second distributing fund in order to spread the risk as broadly as possible.

The Deka-Immobilien Europa fund ( DE0009809566) invests, as the name suggests, in real estate in Europe. There are 1 percent running costs. Therefore, this fund should be included in the portfolio with 10 percent.

 

This would mean that 50 percent of the portfolio shares would already be well-diversified geographically. The type of investment (stocks, bonds, real estate) is also very diversified. In addition to these funds, it is also advisable to diversify the individual sectors.

MSCI World Socially Responsible Fund (LU0629459743)

With 25 percent of would MSCI World Socially Responsible Fund (LU0629459743) also at that. This fund invests globally in sustainable and ecologically acceptable values and is also profitable.

The running costs are only 0.22 percent. This makes this ETF an affordable option.

Morgan Stanley Global Opportunity Fund (USD) A (LU0552385295).

Last but not least, there is the aforementioned Morgan Stanley Global Opportunity Fund (USD) A (LU0552385295). This invests in IT values, communication, industry and non-consumer goods.

Due to its high return and the diversification of industries, it is a good addition to the portfolio.

Should one still invest in funds now?

Markets all over the world collapsed during the corona pandemic. Share prices plummeted dramatically. At least temporarily, because afterwards the prices rose again to the previous year’s level.

In principle, it is always advisable to invest in funds, as short-term price losses can be made up quickly and offer an investment opportunity.

Funds can then be available at short notice at a favorable price. However, a distinction must be made. There are mutual funds that are riskier than others.

This risk can be seen in the key figures. Funds can lose tremendous value even in the short term, which is why only medium and long-term fund investments are recommended.

With a monthly savings plan on a low-cost fund, the compound interest effect can be exploited, which will achieve high price gains, especially in the future.

Nevertheless, it can’t hurt to look at the market and the composition of the fund in order to avoid possible mistakes when selecting a fund.

Fund investing Conclusion: is a long-term investment better than stocks?

Funds are an excellent way to build and hold long-term wealth. The main advantage of funds lies in the spread of market values.

If one stock in one fund crashes, the others can make up for the loss, whereas a direct equity investment does not. If the stock crashes, you’re left with the loss. 

The investment is particularly easy with the help of modern ETFs. TradeATF has a colourful selection of such assets and allows commission-free trading of such financial products and stocks.

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FAQs

There are many different types of funds. Although funds already invest in many market stocks, a broad diversification according to geography, industry and type of investment is important. It also depends on your specialist understanding of the respective industry and the market when it comes to which fund you invest in. American multi-billionaire Warren Buffett says: only invest in things you understand!

Funds have a decisive advantage over stocks: Although a shrewd stock market expert like Warren Buffett can achieve his wealth with stocks, this hardly applies to normal private investors. You are, therefore, often better advised to buy various funds than to buy stocks.

Inexpensive ETFs, which you can save up on a monthly basis, are most suitable for building up your wealth. In the short term, however, funds are unsuitable. In addition, as with any capital investment, you should only use money, which you could do without at least temporarily if the worst comes to the worst.

We recommend the broker TradeATF, which has many ETFs on offer and enables various CFD positions.

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