Financial engineering : Question 13
What are the advantages of UCITS over direct investments, and how do they work?
UCITS (unit trusts or mutual funds) have two advantages over a direct investment.
1. They make it easier to diversify risks: when you've only got 1,000 euros, it may be difficult to put together a very diversified portfolio which reduces risk without sacrificing earnings, but this is not a problem when you own a share in a UCITS, as you hold 0.000001% of a highly diversified portfolio
2. UCITS are managed by professionals who have a better understanding of financial mechanisms than the ordinary retail investor (usually, there may be exceptional cases!), and have access to more information more quickly. Logically, they should perform better than any investment made by an ordinary retail investor, which justifies the fee charged to holders of shares in UCITS.
1. They make it easier to diversify risks: when you've only got 1,000 euros, it may be difficult to put together a very diversified portfolio which reduces risk without sacrificing earnings, but this is not a problem when you own a share in a UCITS, as you hold 0.000001% of a highly diversified portfolio
2. UCITS are managed by professionals who have a better understanding of financial mechanisms than the ordinary retail investor (usually, there may be exceptional cases!), and have access to more information more quickly. Logically, they should perform better than any investment made by an ordinary retail investor, which justifies the fee charged to holders of shares in UCITS.