Many Swiss banks and some Swiss insurance providers offer investment accounts based on mutual funds. These accounts are marketed as delivering higher yields than regular savings accounts. In this age of miserable interest yields, earning a decent return on assets invested in banks has an obvious appeal. But before you place your hard-earned savings in an investment account, it is important that you understand how these accounts work.
What is an investment fund account?
There are many different kinds of investment accounts. The investment accounts offered by Swiss banks are typically investment fund accounts. These are a form of savings account through which assets deposited in the account are invested in one or more mutual funds. Instead of earning interest at a fixed rate as with savings accounts, you profit from possible dividend distributions and growth in the value of fund shares.
Banks generally let you choose the mutual funds which you want to invest through from a curated list of funds. You are generally free to switch to other mutual funds of your choice. Some accounts limit you to a fixed number of mutual fund switches every year).
In addition to Swiss franc accounts, many Swiss banks offer investment accounts based on the U.S. dollar or the euro.
What do investment accounts cost?
Typically, no fees are charged for account opening and closing. Some banks charge a flat annual account maintenance fee which covers most charges. For example, Bank Cler charges an annual fee equal to 0.75% of your investment account balance, but that fee includes custodial fees and Bank Cler’s brokerage fees. The Basler Kantonalbank also charges a 0.75% flat fee which covers account maintenance, custodial fees and the bank’s brokerage fees. UBS charges a low annual account maintenance fee of just 0.14%, but UBS brokerage fees are charged separately.
Which pricing model works best depends on how often you make deposits and withdrawals or switch your account’s mutual funds. An account with a high but all-inclusive flat fee could work well if you frequently deposit or withdraw money or switch funds, because each of these actions involves the buying and selling of shares and resulting brokerage fees. Using an account with a low annual maintenance fee but separate brokerage fees can work out cheaper over the long term if you do not make regular deposits and withdrawals or switch funds often.
The most significant fees applicable to investment accounts are the fees charged by mutual funds themselves, and you pay these regardless of your bank’s pricing model. Fund fees are generally passed on to you as the account holder. The more money you place in your account (and therefore invest in funds), the more you can expect to pay towards fund fees. Ongoing mutual fund fees are collectively referred to as the total expense ratio (TER). The TER typically ranges between 0.5% and 2% of share value, depending on the mutual fund in question. If, for example, you hold CHF 50,000 in shares in a mutual fund with a 1% TER, you pay CHF 500 in fees to that mutual fund every year. Investment funds typically charge a fee when you buy shares (the front-end load) and when you sell shares (the back-end load).
What are the withdrawal limits?
Depending on which account you use, withdrawals may be limited to a portion of your assets. For example, UBS lets you withdraw up to 80 percent of your assets from your investment fund account upon demand. You may have to wait until the sale of fund shares is complete (typically 2 days) before your withdrawal is cleared.
What are the risks?
When you open an investment account, bank representatives work to determine your risk tolerance and help you select mutual funds based on their assessment. If your risk tolerance is low, all or most of your assets are invested in funds based on secure investment instruments like bonds or medium term notes. The more risk you are willing to take on, the more equity-based mutual funds will be included in your investment.
As a general rule, more risky funds which invest primarily in stocks can potentially deliver higher returns. But you also stand to lose more if investments do not perform well. The less risk you are willing to take on, the lower your potential profits will be – but the chance of losing money is also lower.
Regardless of your risk tolerance, it is important to understand that mutual fund fees (TER) and investment account fees are deducted regardless of whether investments perform well or not. These can take a significant bite out of your profits. If investments perform poorly, or if the yield on your investments is low (in the case of low-risk funds, for example), the combined costs of mutual fund TERs and account fees may exceed the returns you earn. In that case, your account could steadily lose money instead of gaining in value.
Example: You use an investment fund account with a 0.75% annual account fee. You opt to invest through a low-risk mutual fund which has a TER of 1.5%. If the fund delivers a return of 2% per annum, your profit would be lower than the combined costs (0.75% + 1.5% = 2.25%), so you would lose money at the rate of 0.25% of your account assets every year.
When you select mutual funds for your investment account, pay careful attention to the fees and charges attached to each fund. Track the performance of your account to determine the clean profit you earn after all fees are deducted.
Note: Exchange traded funds (ETFs) – which passively track market indexes – generally have a lower TER than actively-managed mutual funds. Many ETFs deliver returns similar to those achieved by actively-managed funds. If the list of funds which can be used with your investment fund account includes ETFs, compare their TERs to those of the other funds listed. You may save a lot of money by sticking to ETFs for the investment of your assets.
An alternative is to buy shares in ETFs through a cheap online broker and bypassing the investment fund account altogether. You can compare brokers using the interactive online broker comparison on moneyland.ch.
Investment fund accounts provide a simple way to invest with mutual funds that does not require a great deal of investment know-how or investment capital. However, even when fund deliver positive returns, you stand to lose money on fees and charges if these outweigh returns – which can be the case when you opt for low-risk funds with low yields.
Unless you are willing to take on some risk to increase your chances of earning a decent return, you may be better off using a savings account. Savings accounts are generally free of charge in Switzerland and offer guaranteed returns in the way of interest – albeit at modest rates. You can use the Swiss savings account comparison to find the savings accounts which pay the highest interest.