Investment Funds

The Law on Investment Funds is created following the concepts of the best international practices in regulation of these institutions. It provides for a series of control mechanisms, which increase safety of investing in investment funds and safeguard investors from fraud and abuses. Thus, for example, the Commission grants approvals to holdings that exceed 10% and to management members. Assets of the funds are completely separate from the assets of the management company and they are kept with a custody bank. The custody bank controls calculation of fund asset value and checks whether investments are in the line with the fund’s prospectus. Marketing should also meet the set standards so that potential investors are correctly informed.

However, the regulations may add to the adequate information about the risks implied when investing in a fund, but it is on investors to make an investment decision and to bear the risk thereof.  As there are no limitations regarding the potential returns, there are no limitations to potential losses as well. Therefore, it is crucial the citizens understand the risks and estimate whether the funds are the right choice at all. If so, choose the type of the fund that best suits your needs.

The Securities Commission supervises investment funds. The Commission may pronounce a public warning, initiate proceedings before a competent body, withdraw approval to management members and director and suspend issuance of securities for a period of up to three months. The Commission also has the authority to revoke licenses from management companies.

Portfolio diversification is a means of decreasing investment risk by investing in different securities of different issuers.  In this way, only a part of the portfolio may decrease in value and such depreciation can be even compensated by an increase in value of the other part of the portfolio (if negatively correlated). Of course, in order to diversify a portfolio (according to some theories, a minimum number of shares for a well diversified portfolio is 15), significant resources are required, which are usually not in possession of small investors.
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