Investment funds play a crucial role in the financial market by offering a collective investment approach while allowing individual investors to retain ownership and control over their own stakes. These institutions provide management expertise, lower costs compared to individual investing and a wider range of investment opportunities.
Investors only need to define their goals, risk tolerance and other preferences to choose a fund that aligns with their needs. The fund’s portfolio manager is responsible for making investment decisions and implementing the strategies outlined in the fund’s prospectus.
Investment funds can generally be categorized into two types: open-end funds and closed-end funds. Open-end funds continuously issue and redeem investment units based on the value of their assets, providing a benchmark for entry and exit. Closed-end funds, listed on stock exchanges, trade like stocks, with their market value determined by supply and demand.
In recent decades, exchange-traded funds (ETFs) have gained popularity. ETFs are a variant of open-end funds, offering continuous trading on stock exchanges and typically lower costs. In contrast, hedge funds, which are less regulated and employ riskier investment strategies, are designed for experienced investors seeking above-average returns.
Transition era: The early days of investment funds in Eastern Europe
During the transition period, some Eastern European countries used privatization investment funds to distribute vouchers to citizens, who then became co-owners of privatized companies. These funds later transformed into closed-end funds. Unlike these countries, Serbia did not initially use this method of privatization, focusing instead on privatization laws targeting former and current workers and strategic sales.
The stock market in Serbia, reactivated post-2000, saw shares of privatized companies become key trading subjects. Investment funds were introduced later, in 2006, when the market was overvalued and the managers lacked experience to handle the subsequent financial crisis. As a result, Serbian investment funds struggled, and interest in these collective investment vehicles waned.
From boom to bust: The investment fund industry’s Journey
The stock market boom of 2006-2007 initially benefited investment funds, with early funds quickly raising significant assets. However, the 2008 stock market crash, which saw a 75% drop in the Belgrade Stock Exchange, severely impacted the fund industry. Many funds closed, and the market underwent consolidation, with assets remaining below the scale needed for break-even performance.
The low-interest-rate environment led banks to develop cash funds to preserve property values and prevent deposit outflows. These cash funds, offering slightly higher returns and liquidity, have become dominant in the market, with assets exceeding one billion euros. However, other types of funds, particularly those investing in riskier equity securities, have struggled to attract interest due to past market experiences and a general lack of investor knowledge.
The rise of alternative investment funds
In recent years, alternative investment funds have made significant progress. These funds, which offer greater investment flexibility and benefit from favorable local regulations and tax incentives, are currently the most attractive segment of the industry. However, their long-term success will depend on delivering strong returns, as tax incentives alone cannot sustain growth without performance.
The future of Serbia’s investment fund industry will hinge on the quality of results delivered by these funds and their ability to adapt to market demands and investor needs.
