How Does Money Grow? Investing is a way to make money with your money.

First, you have to earn money. As a kid, you get money from allowance, gifts, services, or from selling goods such as lemonade. Try to save some, if not all of this money. The next step is to make your money grow through investing. The chart below illustrates this process.

Why Should I Invest? There are two main reasons why you should invest: To stay ahead of inflation To achieve financial goals Inflation causes the increase of prices. When a Big Mac goes up from $1.20 to $1.50 or when gas goes up from $1.30 to $1.70 a gallon, we say that is inflation. You need to make more money just to keep up with the rising cost of living. Financial goals can be separated into two types: Short-term goals - Things that you need or want now or within the year, such as a bike, a computer, or a video game. Generally, it takes less money to reach these short-term goals. Long-term goals - Things that you need or want in a few years or more, for example, going to college, buying a house, and even starting a business. Generally, these goals are expensive and require some planning.

When Should I Invest?

The earlier you start investing, the sooner you can reach your financial goals. Investing is like "planting" money. A small amount of money invested will often grow to a larger sum over time. Youve heard the phrase, "Time is money." With investing, time also makes money.

What are the Risks? Although investing can make money with money, the downside of investing is that there is a risk of losing your money. .. What is the difference between investing and speculating?

The main difference between speculating and investing is the amount of of risk undertaken in the trade. Typically, high-risk trades that are almost akin to gambling fall under the umbrella of speculation, whereas lower-risk investments based on fundamentals and analysis fall into the category of investing. Investors seek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk. On the other hand, speculators are seeking to make abnormally high returns from bets that can go one way or the other. It should be noted that speculation is not exactly like gambling because speculators do try to make an educated decision on the direction of the trade, but the risk inherent in the trade tends to be significantly above average. As an example of a speculative trade, consider a volatile junior gold mining company that has an equal chance over the near term of skyrocketing from a new gold mine discovery or going bankrupt. With no news from the company, investors would tend to shy away from such a risky trade, but some speculators may believe that the junior gold mining company is going to strike gold and may buy its stock on a hunch. This would be speculation. As an example of investing, consider a large stable multinational company. The company may pay a consistent dividend that increases annually, and its business risk is low. An investor may choose to invest in this company over the long-term to make a satisfactory return on his or her capital while taking on relatively low risk. Additionally, the investor may add several similar companies across different industries to his or her portfolio to diversify and further lower their risk. . Differences between investment and speculation

Differences between investment and speculation 1. Investment: Investment is rationally based on the knowledge of past share price behaviour. From such knowledge, it is possible to compute the probability of future return.

A common method of investment analysis is to study the past range of PER or DY of a particular share or a class of shares. From this study of its past price range, we can predict the likelihood of its price being out of this range in the future. By comparing its current price with the expected future price range (future price = future PER x future earnings) we know whether the current price is too high or too low and take the necessary action accordingly.

Speculation: Speculation is purely based on the HOPE that the future price will be higher rather than on anything tangible. 2. Investment: Investment requires an investor to do some work before hand anddecisions are made based on known facts and figure.

Such work typically may consist of estimating future level of Earnings Per Share and computing the past range of the PER. By multiplying the future EPS with the likely PER, we have an estimate of the future level of price. If the present price is very low compared with the future price, we buy and vice versa.

Speculation: Speculation is usually based on wild rumours and unsubstantiated hearsays which cannot be checked for accuracy. Undoubtely, speculation is a lot easier than investment but one tends to reap what one sows. 3. Investment: Investment is made for the long term (i.e. two years or more)based on the idea that one is much more certain when one is trying to predict the cumulative results of many daily movement. Once invests with the knowledge that over the long run, the real investors will always make a gain. Speculation: Speculation is usually for the short run (i.e three months or lessunless one is caught whence a speculator is then forced to become an investor), based on the idea that certain events may result in a rise in price (bonus, rights, takeovers, and others). 4. Investment: Over a long period of time, true investment tends to produce a positive result. Based on many years of research in the US and Europe, Long Term Investment consistently produced much higher return than fixed deposit or the inflation rate. The Malaysian experience has mirrored the Western experience. Speculation: Since speculation is not based on anything concrete, its result is not at all predictable. Speculation can occasionally produce very high gains just as it can produce very high losses. Over a long period of time, speculation is most unlikely to produce better return

than true investment. 5. Investment: True investors can sleep soundly at night since they have a fairly good idea of the possible extent of their loss and gain before hand. Besides, since they are investing for the long term, they can forget about short term movements and ignore the market most of the time. Speculation: Speculation is likely to lead to many sleepless nights and anxious dayssince its result is so uncertain. The speculator will have to be always on the alert to take the necessary quick action to catch the right moment. The terms "speculating" and "investment" are often used interchangeably, but they are very different approaches to purchasing investment products. Speculating is more of a psychological trading method, where a buyer of stocks or other products makes his purchases based on feelings or sentiments of the market. Investing typically means the buyer uses quantitative and factual data to make decisions. Basis Speculators are sometimes referred to as "glorified gamblers," because their investment decisions are based more on hunches and feelings. They often look at market trends and try to buy stocks as they move up. Investment decisions are based more on the study of company financial reports, analyst opinions, statements of future direction and the competence of company leadership. Investors, on the other hand, consider factors like the ratio of earnings to share price, cash flow, and long-term debt to analyze decisions . Investment vs Speculation Speculation and investment are very similar to each other and carry a similar target of making profits. However, these two concepts differ from each other mainly by the level of risk tolerance. While a speculator takes a larger risk, he expects abnormal profits. An investor takes a moderate level of risk and expects satisfactory returns. The following article clearly explains the two concepts and provides a clear distinction between the two. Investment Investment in simple is referred to as monitory asset that is purchased with the hope that it would yield income in the future. Investments can be made in a number of forms depending on the investment return the investor requires and the risk that he is willing to take. Investments can be made through the purchase of an asset that is expected to appreciate in value in the future. Examples are the purchase of land, buildings, equipment and machinery. Investors can also invest their funds in money markets using investment instruments such as bills, bonds, etc. The investment made by an individual depends on their risk appetite and the return that they expect. An investor with a lower risk tolerance may chose to invest in safe securities such as treasury bills and bonds which are very safe but have very low interest. Investors with a high risk tolerance may make risky investments in stock markets that yield higher rates of return.

Speculation Speculation is the taking of higher risk and standing the possibility of losing all money invested. Speculation is similar to gambling and entails a very high risk that an investor may loose all his money or make very substantial returns if his speculation turns out to be correct. However, it must be noted that speculation is not exactly the same as gambling, because a speculator will take a calculated risk whereas gambling is more of a decision made on chance. The motivation for an investor to speculate is the possibility of making substantial returns, even though they maybe at the risk of losing all. The following is an example for speculation. An investor decides to invest his funds in the stock market and notices the stock of company ABC is overpriced. In a speculative move, the investor will short sell the stock (short selling is where you borrow stock, sell it at a higher price and buy it back when the prices falls). Once the price falls the stock will be purchased at the lower price and effectively returned to its holder. This move is an example of speculation that entails very high risk because if the stock actually increased in price the investor would have made a substantial loss. Speculation and Investment Speculation and investment are often times confused by many to be the same thing, even though they are quite different to each other in terms of the asset that is being invested in, the amount of risk taken, investment holding period and the expectations of the investor. The main similarity between investing and speculating is that, in both instances, the investor strives to make a profit and improve his financial returns. The major difference between the two is the level of risk that is taken on. An investor tries to make satisfactory returns from funds invested by taking lower and moderate levels of risk. A speculator, on the other hand, takes a much larger amount of risk and makes investments that may yield abnormally large profits or equally large losses. Summary: Speculation vs Investment Speculation and investment are often times confused by many to be the same thing, even though they are quite different to each other in terms of the asset that is being invested in, the amount of risk taken, investment holding period and the expectations of the investor. Investment in simple is referred to as monitory asset that is purchased with the hope that it would yield income in the future. Speculation is the taking of higher risk and standing the possibility of losing all money invested. Speculation is similar to gambling and entails a very high risk that an investor may lose all his money or make very substantial returns if his speculation turns out to be correct. How do we know when were investingor speculating but thinking were investing? Its not always obvious. One of the factors that can make it difficult to know the difference betweeninvesting and speculating is that both produce gains and losses. Some sound investment strategies can turn

losses for a few years, while speculating rakes in high returns just long enough to earn some credibility. Since the lines between investing and speculating can often be blurry how do you spot the difference between the two? The Quick Killing Part and parcel of speculating is the quick killingthe chance to make big money fast. It may be the single factor that most separates investors and speculators.

The speculator welcomes the potential for thequick killing, in fact his whole investment strategy may center on it. Find a stock or two that will double, triple or even rocket to the moon in a few weeks or months. Once it has, sell at a huge profit, then move on to the next stock. The problem with this approach is that not only can it produce large gains, but it can also generate lossesbig ones. But a true speculator may see losses, even big ones, as part of the cost of making the quick killing. With true investing, limiting lossesespecially big onesis every bit as important as finding winning investments. An investor might shy away from anything that looks like a quick killing because he knows that making money through investing is tough enough, but overcoming losses is harder still. Patient Capital Investing involves the long view, sometimes known as patient capital. Gains and losses will vary from year to year, so the emphasis needs to be on multi-year performance. That requires positioning not only in the right investments, but also in the right mix of investments that will be likely to perform over the long haul.

The investor buys right, then sits and waits for his investments to payoff. The results of an average return of 8-10% per year can be more profitableand easier on the emotionsthan a strategy of up 25% one year, down 30% the next. Speculating is often an in-and-out process. The speculator is a trader, moving quickly in and out of investments as trends and opportunities dictate. It could be said that where the investor acts, the speculator re-acts. Diversification Investing involves building a portfolio of mutually exclusive investments centered on the question what if? As in what if Im wrong? The speculator is sure he wont be wrong, and doesnt bother to diversify. The investor never assumes as much certaintyand protects himself by diversifying his portfolio. Investing means never having too much money tied up in a single investment or investment class, as a way of protecting from sudden reversals. Even if stocks are doing well, the investor still has a substantial percentage of his money in cash equivalents and bonds. The speculator, always looking to maximize potential returns, is more likely to see diversification as a reduction in the amount of capital available for speculative investments. Buying value versus buying into trends Speculating often involves betting on trends. If energy stocks have been rising for the past few years then thats where you put the majority of your money. And you stay in that sector until a similar trend emerges in another. The problem with trends is that once they reverse, losses can be sharp and relentless. If those reversals are part of a general market trend, the speculator may be stuck riding the market down. The effect however may be greater because stocks that rise the most in rising market usually fall the hardest in a slide. The speculator may lose most or even all his money, forcing him to rebuild his capital base for another try.

The investor knows how fickle trends can be and concentrates his capital on value instead. He looks for stocks that have above average growth trends, a steady track record on profits and are strong performers in their industry. He may also seek companies that are undervalued otherwise solid businesses with relatively low stock prices, often for no other reason than that they arent favored by the trend du jour. Because of the emphasis on the underlying value of the companies behind the stocks he buys, the investor isnt as subject to market swings the way the speculator is. In this way, the investor is likely to have much higher long term returns on the money he invests. Creating real value versus raw speculation Investing seeks consistent cash flows, and that can only come from businesses and industries that create real value in the economy. The investor looks for companies with successful track records as leaders and innovators in their industries, the kind of businesses that are likely to survive and thrive even in uncertain times. Speculating seeks to make more moneywhere it comes from usually isnt a factor. This opens the door to betting on upstart companies, new industries, crisis plays, future price increases or takeover rumors. All of these are pure gambling because theyre either based on events that havent yet happened or on businesses with no established track record. We can call that buyand-hope! And it can either win bigor lose big. Is all speculating bad? All of us probably have a little bit of a speculator inside of us waiting to get out, and thats not necessarily a bad thing. There may even be times when its worth letting our inner-speculator loose! If you do decide to take a chance with your moneyto take a gamble on something you feel but cant justify objectivelyjust keep a few rules in mind 1. Never gamble with money you cant afford to lose 2. Make sure you have a solid mix of cash equivalents, bonds and investment quality stocks and mutual funds as the vast majority of yourinvestment portfolio

3. Keep the speculating percentage of your portfolio in the low single digitsif the gamble is a success, it might return several times your investment, but if it flops youll only be out a little 4. Dont do it too oftentheres a saying in the investment world, bulls make money, and bears make moneybut traders go broke! .. Investment: 1.the investor invest for long term gain purpose 2. The investor holds securities for long period. 3. Risk is less as compare to speculation 4. The rate of return is less as compare to speculation Speculation: 1.the investor invest for short term gain Purpose 2. The investor hold securities very short period say 1 or 2 days 3. Risk is high 4. Rate of return is more 5. it involve buying and selling of securities investor are for long term but speculator plays a crucial role in derivative market .they dont bear about the risk but their main aim is to increase profit. Investment is a function of savings. It has the capability of generating series of future cash-flows and generating employment. Buying shares and all is not an investment activity - It is just an example of re-allocation of money. Example of investment - investing in real estate which generates employment and cash flows. Investment is an extremely important variable as far as G in Keynesian C+I+G+NX are concerned. It stimulates the multiplier. As far as speculation is concerned; there are three prime motives to hold money - Transactionary, Precautionary and Speculative. Speculative motive of holding money is basically contrasting different opportunity costs on different available options and then to go ahead with the best deal according to them. Investing in shares, commodities and all is speculative as their price keep on changing. Investing in bonds is also speculative as the price of bond will fall if interest rates go up and in such case opportunity cost for holding money is high. As far as investment being long term and all is concerned - they are obvious and hence not a primary difference. I hope it is clear. I wanted to avoid jargons but if one use them in interview it is always a leading indicator that one knows in and out. Investment is the process of protecting your principal amount with adequate returns after thorough analysis of market; activities other than this are called as speculation. Investment has different meanings in finance and economics. In economics, investment is related to saving and deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.

In finance, investment is putting money into something with the expectation of gain, usually over a longer term. This may or may not be backed by research and analysis. Most or all forms of investment involve some form of risk, such as investment in equities, property, and even fixed interest securities which are subject, inter alia, to inflation risk. In contrast putting money into something with a hope of short-term gain, with or without thorough analysis, is gambling or speculation. This category would include most forms of derivatives, which incorporate a risk element without being long-term homes for money, and betting on horses. It would also include purchase of e.g. a company share in the hope of a shortterm gain without any intention of holding it for the long term. Under the efficient market hypothesis, all investments with equal risk should have the same expected rate of return: that is to say there is a trade-off between risk and expected return. But that does not prevent one from investing in risky assets over the long term in the hope of benefiting from this trade-off. The common usage of investment to describe speculation has had a effect in real life aswell: it reduced investor capacity to discern investment from speculation, reduced investor awareness of risk associated with speculation, increased capital available to speculation, and decreased capital available to investment. In economics or macroeconomics In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production (i.e. capital). Examples include railroad or factory construction. Investment in human capital includes costs of additional schooling or on-the-job training. Inventory investment is the accumulation of goods inventories; it can be positive or negative, and it can be intended or unintended. In measures of national income and output, "gross investment" (represented by the variable I) is also a component of gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports, given by the difference between the exports and imports, X M. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP C G NX). Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I. "Net investment" deducts depreciation from gross investment. Net fixed investment is the value of the net increase in the capital stock per year. Fixed investment, as expenditure over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock that is, accumulated net investment to a point in time (such as December 31). Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.[1]

[edit]In finance In finance, investment is the application of funds to hold assets over a longer term in the hope of achieving gains and/or receiving income from those assets. It generally does not include deposits with a bank or similar institution. Investment usually involves diversification of assets in order to avoid unnecessary and unproductive risk. In contrast, dollar (or pound etc) cost averaging and market timing are phrases often used in marketing of collective investments and can be said to be associated with speculation. Investments are often made indirectly through intermediaries, such as pension funds, banks, brokers, and insurance companies. These institutions may pool money received from a large number of individuals into funds such as investment trusts, unit trusts, SICAVs etc to make large scale investments. Each individual investor then has an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied. [edit]History The Code of Hammurabi (around 1700 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death. In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. By the 1950s the term investment had been co-opted by financial brokers and their advertising agencies to promote speculation. The terms speculation and speculator have long had negative connotations. [edit]Types of investment Types of investments include:

Traditional investments Alternative investments

Basic Investment Objectives The options for investing our savings are continually increasing, yet every single investment vehicle can be easily categorized according to three fundamental characteristics safety, income and growth - which also correspond to types of investor objectives. While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others. Let's examine these three types of objectives, the investments that are used to achieve them and the ways in which investors can incorporate them in devising a strategy. Safety Perhaps there is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet we can get close to ultimate safety for our investment funds through the

purchase of government-issued securities in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the economy's top companies. Such securities are arguably the best means of preserving principal while receiving a specified rate of return. The safest investments are usually found in the money market and include such securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips; or in the fixed income (bond) market in the form of municipal and other government bonds, and in corporate bonds. The securities listed above are ordered according to the typical spectrum of increasing risk and, in turn, increasing potential yield. To compensate for their higher risk, corporate bonds return a greater yield than T-bills. (For more insight on treasuries, read Buy Treasuries Directly From The Fed.) It is important to realize that there's an enormous range of relative risk within the bond market. At one end are government and high-grade corporate bonds, which are considered some of the safest investments around; at the other end are junk bonds, which have a lower investment grade and may have more risk than some of the more speculative stocks. In other words, it's incorrect to think that corporate bonds are always safe, but most instruments from the money market can be considered very safe. Income The safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa. In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment ratings. Investment grade bonds rated at A or AA are slightly riskier thanAAA bonds, but presumably also offer a higher income return than AAA bonds. Similarly, BBB rated bonds can be thought to carry medium risk but offer less potential income than junk bonds, which offer the highest potential bond yields available, but at the highest possible risk. Junk bonds are the most likely to default. Private Cloud Hosting Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio every month. A retired person who requires a certain amount of money every month is well served by holding reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans, for example. Growth of Capital This discussion has thus far been concerned only with safety and yield as investing objectives, and has not considered the potential of other assets to provide a rate of return from an increase in value, often referred to as a capital gain. Capital gains are entirely different from yield in that

they are only realized when the security is sold for a price that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as a capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of investment returns from their portfolio, but rather those who seek the possibility of longer-term growth. Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value. For this reason, common stock generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future. Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures. Yet rarely is any common stock able to provide the nearabsolute safety and income-generation of government bonds. It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared toward the growth plans of small companies, a process that is extremely important for the growth of the overall economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that help the economy grow. Secondary Objectives Tax Minimization An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to anIRA or other tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy. (For related reading, see Which Retirement Plan Is Best?) Marketability / Liquidity Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains. Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren't likely to be held in his or her portfolio. Conclusion As we have seen from each of the five objectives discussed above, the advantages of one often comes at the expense of the benefits of another. If an investor desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios will be guided by

one pre-eminent objective, with all other potential objectives occupying less significant weight in the overall scheme. Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that depends on such factors as the investor's temperament, his or her stage of life, marital status, family situation, and so forth. Out of the multitude of possibilities out there, each investor is sure to find an appropriate mix of investment opportunities. You need only be concerned with spending the appropriate amount of time and effort in finding, studying and deciding on the opportunities that match your objectives. characteristics of an investment fund what is an investment fund? An investment fund is a vehicle that allows a number of separate and unrelated investors, a group of individuals or companies, to make investments together. By pooling their capital, investors can share costs and benefit from the advantages of investing larger amounts, including the possibility of achieving a broader diversification among a number of different assets and thus spreading their risks. There are many possible arrangements in the way an investment fund can be set up and operated, generally depending on the needs of the funds investors. The number of investors in a fund is not fixed. Investment funds can be designed in different forms, for example as an investment company with a board of directors and the investors as shareholders, or as a contractual agreement between the investors and the management company. Funds can be initially set up with an indefinite lifespan, or for a fixed period. They can hold traditional financial assets such as shares and bonds, or investments as exotic as vintage wines, paintings or copyright rights. They can generate income for investors, or seek to maximise the capital value of their investments. They can be open for sale to any individual investor, or be restricted to sophisticated investors such as financial institutions or very wealthy families. Luxembourgs fund laws cover many different kinds of fund, but the most important category is UCITS funds, which are set up according to the strict rules prescribed by the European Union and may only invest in certain investment classes. UCITS funds can be purchased by investors in any European country where they are authorised for sale, and in a number of countries in other regions or on other continents where they are permitted, such as certain Asian countries. Luxembourg is home to nearly three-quarters of all the European funds that are sold to investors in more than one country. fcp v. sicav FCPs and SICAVs are two of the most important fund types in Luxembourg. Both kinds can be set up as UCITS funds. FCP stands for the French expression "Fonds Commun de Placement", meaning a common investment fund. Like a unit trust in the UK, an FCP is set up in the form of a contract between the fund manager and the investors, in a similar way to a partnership, and is

not a separate legal entity in its own right. Instead, the legal entity is the management company setting up the fund. Investors hold units in an FCP. SICAV stands for "Socit dInvestissement Capital Variable",or open-ended investment company, whose ownership is in the form of shares. With SICAVs, the fund itself is a stock corporation and thus a legal entity. The company's capital depends on the amounts paid in by investors. As with an FCP, shares in a SICAV are bought and sold on the basis of the value of the funds assets, or net asset value. In accordance with applicable law and regulations, a SICAV can either appoint a separate management company or can be self-managed. Technically, it makes little difference in practice whether a fund is an FCP or a SICAV. However, there may be personal tax implications and you should consider this carefully with your financial advisor. accumulation v. distribution Some investors want to receive regular income from their fund investments. However, others want to build up the value of their initial investments by reinvesting any profits in the investment fund. Therefore, funds offer a choice between distribution units, which pay out earnings (e.g. from any interest or dividends received) at regular intervals, and accumulation units, which automatically reinvest earnings on fund assets back into the fund. An investment fund with distribution units may be the right choice if you need extra income from your investments on a regular basis, while accumulation units may be better suited for your needs if you are investing for a long-term goal such as retirement. The value of distribution shares may rise in value over time, but the increase will probably not match the rapid growth experienced by an equivalent investment in accumulation shares, since distributions decrease the fund's assets, and thus, its unit price. As a rule, the reinvestment of earnings with accumulation units is free of charge and occurs automatically. By contrast, if you first had the earnings credited or paid out as you would with distribution units and then reinvested that amount in additional units in the fund, you might pay a sales charge of several percent. Depending on the laws of your country of residence, the tax treatment of distribution and accumulation shares may be different, and you should carefully consider this with your financial advisor.

umbrella funds Many Luxembourg investment funds are so-called umbrella funds, which consist of multiple sub-funds that in effect function as separate investment funds but form a single legal entity. This enables funds with different strategies or that are designed for different types of investor to be established within the same legal structure, which can reduce the funds costs. Generally, the cost of shifting assets from one fund to other is low for investors if both funds belong to the same umbrella fund. Depending on the rules in your home country, however, shifting assets could also entail tax consequences. how a fund price is determined The price of a unit (FCP) or a share (SICAV) in an open-ended investment fund is determined by the value of its assets and is measured as its Net Asset Value (NAV). The NAV is calculated as the market value of the funds assets, minus any liabilities such as expenses or other debt. This figure is then divided by the number of shares or units in the fund that have been issued to investors. For example, if a fund has assets valued at 100 million and liabilities of 5 million, it has net assets of 95 million. If 10 million shares or units are held by investors, its NAV per share or unit is 9.5. That is the price at which shares or units can be bought in the fund or sold back to it, minus (for sales) or plus (for purchases)any fees and commission charges. understanding costs and fees Investors face various fees and charges when they buy and sell fund units, and the investment fund itself will be subject to various fees that are paid out of the funds assets. Investment in funds often involves an initial charge that may be as much as 5% of the value of the initial investment. Normally, this surcharge is not retained by the fund company but rather serves to cover costs of distribution services, as with commissions paid to fund distributors such as banks or other financial advisors. Some funds also charge deductions when fund units are sold or redeemed, especially where the units have only been held for a very short period of time. The ongoing costs incurred by the investment fund are usually measured as its Total Expense Ratio or TER. This comprises the fee paid to the fund management company for deciding on and managing the funds investments, as well as other costs involved in operating the fund. These include safekeeping of assets by the funds custodian bank, calculation of the Net Asset Value, legal fees, auditing and marketing costs.

An important component of the investment funds cost structure will be the fee charged by the fund manager, which depends on the complexity of the funds investment strategy. This means that the TER of actively managed funds can be as high as 2% or even more for very specialised or exotic funds. By contrast, the TER of a passive fund that aims to replicate a specific index is usually less than 1%. understanding investment fund information You can receive information about an investment fund from a variety of sources, the three most important being the fund prospectus, the fund's annual or semi-annual report and the fund's marketing material (including the fund manager's website). All of these sources have the goal of providing investors with information about the characteristics of the fund, although they all put the focus on different aspects and have different ways of providing the information. It is important to read as much information as you can and discuss it with your financial advisor before you make your investment choice. The fund prospectus is the key document from the investment fund. It provides comprehensive details of the fundamental mechanics of the fund, along with an in-depth assessment of the related risks. While the fund prospectus is an important document it can also be a daunting one. The amount of information can often be overwhelming and jargon-heavy, and investors may need the help of a financial advisor. Until June 2011 UCITS funds were also required to produce a simplified prospectus providing a summary of the main prospectus, but this has not proved as user-friendly as originally intended. To replace this, the UCITS IV directive requires fund managers to produce aKey Investor Information Document (most often referred to for short as the KIID, but also sometimes as the KII or KID). This consists of a concise yet comprehensive overview of the funds main features, written in plain language and produced in a standard format. In most cases it covers two A4 pages. Although a tree-page variant exists for structured funds. key investor information document The Key Investor Information Document is a short document that aims to describe the fund in terms that investors should find straightforward and easy to grasp. Its aim is to improve understanding among retail clients of how funds operate and what risks they entail. Fund managers must produce a KIID for every UCITS fund they market and they may choose to produce a separate document for each distinct class of shares or units in a particular fund, for example because performance may vary as a result of the currency of the investment or the distribution policy of the shares or units in question. The KIID is intended to be self-sufficient; the investor should not have to read the funds prospectus in order to obtain enough information to make a decision on whether the fund is an appropriate investment for their needs and investment profile. The UCITS IV directive stipulates that at a minimum, it should contain the name of the fund, a short description of the funds investment objectives and policy, a description of past performance or performance scenarios, details of costs, and the funds targeted risk/reward profile, as calculated by a measure known as the Synthetic Risk and Reward Indicator (SRRI). It should be written in plain language and

predefined form, content and length, enabling investors to compare one fund with another more easily. Significant changes to the fund, such as in its risk/reward profile or in its personnel will require amendment of the KIID (as well as notification of regulators in all the EU countries where the fund is marketed). In addition, the document should be updated at the end of each year and the new version issued within 35 working days of the year-end. Funds established up to July 1, 2011 benefit from a grandfathering clause that gives them up to 12 months to publish a KIID for the first time, but all funds launched from that date onward must have the document ready immediately. The KIID must be published in one or more of the official languages of any member state in which the fund is marketed, or any other language approved by the financial regulator in a particular country. The format and content of the KIID is controlled by the funds regulator, the CSSF in the case of Luxembourg-based funds. For the investment fund industry, the document is a means of delivering information in a more user-friendly form than ever before, which should help to increase investors trust in fund managers and their products. All Luxembourg UCITS funds will operate under the same rules, but other EU member states may set slightly different rules for funds established in their jurisdiction on what the KIID should contain and how the information is presented.

What the KIID contains

The document is headed by the name of the fund and any multi-compartment umbrella structure of which is may be a sub-fund, the share or unit class if appropriate, the name of the fund management company and any bigger corporate group it may belong to. The first section covers the funds objectives and investment policy. The funds goals may include generating income, producing capital growth or in many cases a mix of the two. The investment policy should state what kind of assets the fund invests in, including the type of securities and the characteristics of the companies that issue them, notably the countries in which they are based and the economic sector (such as mining, agriculture, steel, transport, manufacturing, technology or service industries) in which they are active. For example, an investment policy might state that 75 per cent of the assets of the fund may be invested in the shares of banks and financial services companies based in or active in the United States. This section may mention any relevant benchmark, such as a market index used as a measure of comparison for the funds performance. It may also include a recommendation, if any, about the minimum period of investment that may be necessary in order to benefit from the funds investment strategy, for example one year. The Synthetic Risk and Reward Indicator indicates the funds position on a scale between 1 (the lowest level of risk, but potentially bringing a lower reward) and 7 (the highest level of risk, with a potentially elevated reward to match). The document should explain in greater detail what the funds risk level means, some of the factors that might produce changes in its performance, and why the fund has received this particular rating. It may also mention other risks, for instance exchange rate fluctuations that might affect returns from emerging market funds. The KIID will detail charges taken from individual investments or from the funds assets that will reduce the returns received by the investor. These include charges for purchase or sale of the funds shares or units, as well as for switching between different compartments of an umbrella

fund, all calculated as a percentage of the investment value. The document will also list the most recent years charge against the fund for management fees and other expenses, as well as any additional performance fee that the manager may charge on returns above a specified level. The KIID includes details of when the fund was launched, its base currency and the currency in which its performance is calculated, if different. It should chart performance as the year-on-year change (in percentage terms) in the funds net asset value, as well as the corresponding figure for any benchmark the fund uses. This calculation takes into account ongoing management charges and other expenses paid by the fund, but not entry, exit or switch charges paid by the investor. Finally, the document should include practical information such as the identity of the depositary bank that provides safekeeping for the funds assets and where they can find further information including annual (and semi-annual) reports, the most recent net asset value figure, information about other share classes or sub-funds and how to switch between them. All this information should be published on the web site of the funds manager or promoter. Fund prospectus Information within a fund prospectus falls into four main categories: investment objectives and strategies, risk, performance and information for investors. Before reading a fund prospectus, you should first look for the publication date, since changes can be made to a prospectus over time. Investors should make sure that they have the most up-to-date version. A prospectus can normally be found on the fund management or fund promoters website along with any updates on fund details. By contrast with the KIID, there is no obligation to translate the full prospectus and financial accounts of the fund into the official or other languages of countries where the fund is marketed if these are already available in a language customary in the sphere of international finance in practice English.

Investment objective and policy

All investment funds are launched with a clearly defined investment objective or policy. The prospectus will explain what investment policy the fund will follow and what asset classes it will use to achieve its goals. In many cases the prospectus names the benchmark figures, such as indices, that will be used to assess the performance of the fund. Information could also be provided about the benchmark index, particularly in the case of passively managed funds, which aim to track this index as closely as possible. Two different investment funds may have the same investment goal but use different methods to achieve it. The prospectus will outline what investment restrictions and limits the fund is operating within for instance, the maximum amount that can be invested in a single asset, and whether and how the manager may use derivatives. Using this description, investors can decide whether the funds investment goals and policy are in line with their own investment needs.

Risk

Investors should always be clear about the type of risk an investment fund will incur in order to achieve its goals, and should also understand the different types of risk. The prospectus explains which risks the fund is exposed to such as credit, liquidity, interest rate, currency and market risk. Beside the risk profile of the fund you may also see details about the risk profile of a typical

investor who might consider this type of fund. This information and the data on the level of risk to which the fund is exposed will help determine if the fund is a suitable investment choice for you. For instance, the prospectus of an equity sector fund should explain that, in general, the fund is exposed to a significantly greater degree of risk because it invests exclusively in securities from a single sector. The prospectus of a bond fund may highlight the typical quality and creditworthiness of securities from industrialised regions compared with those from emerging economies.

Performance

A prospectus may contain performance information including a historical review of the investment funds performance over specific time periods. This information also allows you to see whether the fund has met its performance goals in the past. In some cases, charts are used to show the evolution of the funds performance and provide a clear visual analysis of its price fluctuations (volatility). You can also use this information to compare the performance of funds that have similar goals but different fund management. It should not be forgotten that investment funds that resemble each other in terms of their investment policy or investment objective are not necessarily managed in the same way. Comparing fund documentation can help you identify differences in structure and strategy. Furthermore, every fund prospectus will state clearly that past performance is not a predictor of future performance something investors always need to keep in mind.

Investor information

This section of the prospectus will include information on how the investment fund is valued and details of how the net asset value (NAV) at which you buy or sell units in the fund is calculated. Here, you will also find out how you can buy and sell fund units as well as the costs associated with doing so. If applicable, the prospectus also provides information about a mandatory minimum investment amount when purchases units. Annual report An investment fund's annual report provides you with information about how well the managers have been performing. It is an important document that presents the funds operations over a specific period and its overall financial position. In the introduction by the fund manager you will find a review of the funds overall performance and a discussion of the markets and investments. Using the annual report, you can assess whether the fund has properly implemented its investment policy, and whether it remains suited to your needs and investment profile. An annual or semi-annual report will set out the funds return, the assets it holds and expenses incurred. The annual report will also contain a report from the funds independent auditor, who will have checked and certified the accuracy of the funds accounts. Marketing documents Marketing documents place a particular emphasis on the advantages of investing in a given fund (the KIID is not marketing material). They are presented in a style and tone that are aimed at the

reader and often refer to the benefits of the investment fund in connection with a specific lifestyle-related theme, such as retirement or funding an education. The purpose of marketing materials is to win new investors. While the paper may be glossy and the images attractive, it should also contain important information about the fund, which might include the funds investment goals and investment policy as well as figures related to the funds past performance. Marketing material should always be read in conjunction with the fund prospectus. how to buy or sell fund units or shares The investment funds prospectus will explain how often fund units or shares can be bought (subscription) and sold (redemption). MostUCITS funds offer daily subscription and redemption, although some restrict this to once a week or twice a month. Sometimes funds may be closed for new subscription and therefore investors cannot purchase units, or fund units can only be purchased by existing investors in the fund. The purchase (subscription) costs and sales (redemption) proceeds will be equal to the value of your share of the funds assets, plus or minus any fees and commission charges. This information is also included in the funds prospectus. The way fund units can be purchased and sold varies from country to country and may differ as a result of the distribution channels used by the management or investment company. This information will be available from your financial advisor or the fund management company. The fund prospectus should also provide details about distribution channels, paying agents and any other agents that can provide this information.