Mutual funds are a booming financial instrument, which generally offered high returns last year. However, the current uncertainty is increasingly calling into question the trend of recent years to replace more conservative options with riskier ones.

At the end of 2021, the estimated assets of investment funds and investment companies worldwide exceeded 61 trillion euros. To get an idea of the volume, suffice to say that it is equivalent to three quarters of the world’s GDP. In Spain, the figure reached 620 billion, 18% more than in 2020, and its profitability in the year as a whole exceeded 6%, according to data from Inverco, an association that brings together collective investment entities and pension funds in Spain.

In percentage terms, mutual funds and investment companies already represent 15.7% of the financial savings of Spanish families, a percentage that is only surpassed by Belgium among the large EU countries, with 17.4%. In Italy, they account for 15.1%, in Germany 12.7% and in France less than 5%.

This is partly explained by the fact that mutual fund holdings in Spain have tripled over the last decade. On the other hand, the investment horizon of savers in the long term (more than three years) has increased significantly in Spain from 35% to 49% in just two years.

However, we cannot lose sight of the fact that deposits and cash still account for most of the financial assets of Spanish households (41%), a percentage that is only surpassed by Portugal (48%) among the major European economies. In France, they account for 29%, in Italy 32% and in Germany 39%.

Different products for different investors

Worldwide, 47% of the assets of investment companies and funds are in equities, 20% in bonds and the remainder is divided equally between mixed and money market products, which invest in the short term in a given currency. 

However, this distribution varies considerably from one country to another. For example, while equities account for 59% of the total in the United States and 51% in the United Kingdom, globally in Europe they account for only 34%. And there are also considerable differences in mixed products, which in Spain are the second most important, with 31% of the total, while in the United States they account for only 6%.

Over the last 15 years, Spanish investors tended to replace more conservative options with riskier ones. Thus, while in 2007 money market, fixed-income and guaranteed funds accounted for 64% of investment, in December 2021 they accounted for only 18% of the total.

Performance in question

However, this greater appetite for risk and variable returns does not seem entirely justified if we look at the long-term performance of mutual funds as a whole. An IESE study indicates that the average annual return of 562 funds that have been active in Spain over the last 15 years was only 1.91%. In fact, only 64 of these funds were more profitable than government bonds, and 68 of them had a negative return.

Moreover, in a context of rising inflation and economic uncertainty, in addition to the probable rise in interest rates by the European Central Bank and the U.S. Federal Reserve, doubts about the evolution of equities arise. For this reason, some voices point out that guaranteed investment funds can be a good option for investors seeking an appropriate balance between risk and return.

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