When talking about mutual funds, it is important to understand this asset class contains great variety, and the specifics of each fund can be totally different from another. To understand the mutual fund market in Denmark, you need a good grasp of how funds work, their legal structure in Denmark and the EU more generally, and what qualifies – or not – as a mutual fund.
What are mutual funds?
When you listen to people talk about mutual funds, you will often get the impression they are just a generic catch-all term for actively managed investment funds. This is mistaken, as mutual funds can be both passive or active, and must meet specific legal requirements to qualify as a mutual fund. These standards differ from jurisdiction to jurisdiction, and in Denmark both the EU and national levels are important.
In short, a mutual fund is a pooled investment where many different clients put their money together, and entrust it to a manager who acts according to strict instructions to grow their capital, by investing it in a certain mix of assets. These restrictions may be very rigid, the fund’s mandate may be passive or active (trying to follow the market or beat it), and fees will vary from fund to fund, but the core structure is the same. These are highly regulated products intended to be used by all investors, even low-information ones.
How can you trade mutual funds in Denmark?
Many banks and brokers in Denmark offer mutual funds, Saxo Bank a well-known example.The normal process is to open an account, an ISA or other type, that allows you to invest your balance as mutual funds. Mutual funds offered to retail investors in Denmark must qualify as UCITS under EU regulation. This differs from country to country, so what exactly qualifies as a mutual fund is not the same everywhere.
Are mutual funds passive?
Robo-advisor and other automated strategies may sometimes use mutual funds as well as ETFs to create their low-cost, passive strategies. This creates a perception that mutual funds are all passive. Sometimes they are, but not always. Most individual mutual funds are actively managed, but the majority of overall AUM in mutual funds skews towards giant passive funds. Vanguard invented passive investing with their tracker passive funds, and despite recent competition from low cost tracking ETFs, passive mutual funds remain some of the absolute giants of the financial marketplace, with countless billions under management.
Mutual funds do not need to be passive though. Portfolio managers in mutual funds can be active traders, not so much as in trading-specific fund types like hedge funds, but the majority of modern portfolio theory was designed for mutual fund managers. Mutual funds will normally charge a flat management fee, and occasionally a performance fee when they beat a certain level. This differentiates them from hedge funds, which typically charge a management fee but always charge a performance fee, and also their mandates are more narrow. Most mutual funds are long only, allowing investment managers to take positions in different companies, sometimes limited by geography or sector.
All of this information will be specified in the signing on documents you fill out when you open your position in the fund. These can be tedious, but it is important to read through the details, or have someone you trust read it for you, as they can contain important caveats.
Some restrictions on mutual funds
One of the issues mutual fund investors sometimes face is restrictions on withdrawals. Withdrawals from mutual funds are subject to lock-in periods, and may take time. This isn’t just to annoy you – mutual funds directly invest client funds into the different holdings in their portfolio, and so if a withdrawal exceeds cash to hand for the fund, they will need to sell holdings to meet the obligation. That unfortunately means in times of market stress, especially when many people try to withdraw cash at once, you might not get the current market value of the portfolio. To avoid this, mutual funds sometimes temporarily ban withdrawals. These are not normal events, but it is worth being aware that if you might need to withdraw money in a hurry, mutual funds are not the best choice.
Retail investors in Denmark are spoilt for choice with the large range of domestic and international mutual funds on offer. It is important to understand the features of the product you are buying: is it active or passive? Are the holdings limited by geography, sector, or some other factor? Who is the manager? What is the withdrawals period? All of these questions, when combined with your own investment objectives and other information, will help you make an informed decision.