Many of us many times think of the best possible way to allocate available monetary funds with not the only purpose to safeguard them against the inflation but to multiply them as well. The majority of our citizenry is practically familiar with one sole way, i.e. to go to a bank and deposit funds. And indeed this is the most famous service for organizations and natural persons. Yet I think there is another well-known way to increase capital. It is investment in securities. And returns of that kind of investments may be significantly higher from that of bank deposits.

And if you’ve made up your mind whether to invest your savings into stocks or not further you’ll face another question: which is the best way to do it?

As everybody knows there are several key methods of work on the securities market. They are the following.

• Self-dependent execution of operations / brokerage services;
• Individual schemes of asset management;
• Mutual forms of investments, i.e. mutual funds.
Self-dependent execution of operations. I buy and sell securities. Everything is very simple and clear.

Is it as clear as that? Operations on any market require attention, knowledge, skills, resources and, in the end, time, the most important component. Practical work shows that primary business of the most part of investors is not directly linked with the securities market. As usual they are engaged in other field and thereby they do not have the necessary information of equity markets and can’t make use of it properly. To trade successfully you should constantly keep an eye on the market. But do you have time for all that business? Do you possess enough money to pay for informational facilities, e.g. for REUTERS?

If you say yes than everything’s just fine. If not let’s consider another variant, individual schemes of asset management.

Certainly individual schemes of asset management have a set of advantages as compared to self-dependent investment. The chief thing is that you do not have to trace the market day after day after day or to eternally turn over in your mind and make decisions. This burden passes to a professional asset manager, who is directly interested in profits of a client, as he gets the premium depending on results of the management. Usually the premium of the managers is calculated as a validly agreed percent of the revenues of the client. Thus the manager always takes success for granted. The structure of any investment portfolio is selected starting from individual characteristics and requirements regarding risk, yield and liquidity of assets. The client also can express his wishes on priority directions of investment.

However individual investment schemes have one considerable disadvantage: services of forming and management of the personal portfolio start when the value of the portfolio comes to tens or hundreds thousand dollars, which is not available for majority of investors.

There is another important point. Do we always precisely know our investment preferences and what are better directions to choose?

And here mutual investment comes to the forefront. Under the Russian legislation it is Mutual Funds (MF). What can we see here? Let us start from some formal but extremely important things. The creation of a MF begins with acquisition of investment shares by participants of the MF. An investment share is a registered security that certifies the right of ownership in the MF. The share also gives its owner the right to take back the invested money together with revenues (in case of augmentation of the capital of the Fund). Sale and redemption of shares are carried out by the Management Company and/or agents of the MF. Both natural and legal persons can be holders of shares.

According to the legislation the MF is a property complex that is not considered to be a legal person. In other words it’s not a taxpayer. From the moment the money is transferred to the Fund (acquisition of a share) up to the moment of redemption (sale of the share back to the manager) investor’s funds are not liable to tax, i.e. all interim revenues are reinvested once again. These facts given all profits and losses on trading operations with different types of securities are completely balanced within the Fund in contrast to brokerage services and individual assets management. This is utterly pleasant and at the same time it’s logical. This way the government stimulates long-term investment. In practice the most part of shareholders of MF in Russia invests for long term. And if a natural person owns a share for more than three years than the share is not liable to the income tax, as we all know. That's splendid! Henceforward investors’ funds are as a matter of fact consolidated into one huge bag. MF are able to invest in a great number of securities due to amalgamation of shareholder’s funds thereby creating diversified portfolios and reducing risk of losses. Types of securities and their stake in the portfolio are subjects of strict regulation of the Federal Commission for the Securities Market and they can’t overstep the limits of certain values.

MF direct efforts towards the widest range of investors smaller they are or bigger. The minimal sum of investment the most part of MF requires amounts 1000-10000 rubbles, which is very democratic. At the same time it’s important to mention that there are a lot of large clients among shareholders of mutual funds. For example they can be regional banks and insurance companies that dispose available funds but don’t want to set up large investment subdivisions.

Shareholders are not able to exert influence upon size and structure of the MF, which is possible under individual schemes of management. But is it so necessary? Nowadays there are a sufficient number of funds with multifarious investment declarations that specify the type of holdings (equities or bonds) and the investment field (power industry, telecommunication etc.). Thus investor escapes from the necessity to scrutinize the stock market. All he needs is to estimate the risk he is ready to bear on investing money into these or those securities when purchasing shares and to watch the value of shares changing, which reflects the successfulness of activities of the manager and thereby the yield of investing into shares.

Among all other advantages of MF we should mention the fact that large volumes bring down the so-called transaction costs for the stock market operations with securities and in turn increase the yield on investment. Taking into consideration the hereinabove it’s obvious why mutual investments are so widespread across the USA and EU countries.

As a result we’ve got a very optimistic picture. Yet someone may ask how safe the system is? Well, the answer is simple but its structure is complicated.

MF in the Russian Federation is a multilevel system of control and security of investors’ rights. In order that the management company can’t misuse these funds they devise to separate the management of funds from their keeping custody. Funds are kept in quite another organization, a specialized depositary, that doesn’t just keep funds but also checks the legality of operations with them. Money can’t be transferred from the account of the Fund without the preliminary verification of destination of payment and the transfer permission of the specialized depositary. The depositary has the right to chancel any transaction of the management company with assets of the fund if there is doubt the transaction is made comfortably to interests of shareholders. The management company is also obliged to send daily accounts to the Federal Commission for the Securities Market (FCSM). The FCSM in turn supervises the specialized depositary. Besides accounts of the fund are subject to financial audit under the legislation in force. The value of assets of the mutual fund can rise or drop but the fund can’t vanish from the face of the earth. It’s worth mentioning that mutual funds unlike banks didn’t stop working in 1998 and survived the default without scandals.

Bringing to the end our discourse about choosing investment schemes from the standpoint of a prospective investor it seems that investment in mutual funds are preferable for the most part. Advertising and developing of this service by investment companies and informing about internals of operations on financial markets for clients will lead to a more accurate business structuring and will be beneficial to millions of present and future clients of the Russian securities market.