20 Mar Benefits of Staying Invested
Many investors may be familiar with the concept that the duration of the investment is more important than the moment of the investment to ensure sustainable profits in the long run. But many investors find it difficult to stay invested when performance changes, an attitude that affects the return on their investment. Credins Premium Fund invests in debt securities issued by the Albanian State or as they are otherwise called government bonds and bonds. These debt securities generate fixed income in the form of a fixed rate called a coupon, a rate which is determined in auctions held periodically by the Bank of Albania. Depending on the economic environment, interest rates can fluctuate both rising and falling from one auction to the next. This rate fluctuation affects the value of bonds and consequently the value of the investor’s investment in the fund. The value of bonds has an inverse relationship with interest rates. When interest rates on future bond auctions decrease, the value of previous bonds investment value increases. The opposite happens when rates rise.
During the periods January 2019 – April 2019 and September 2019 – February 2020, interest rates in the government bond and bond markets had a downward trend, leading to an increase in the fund quota price/investment value. Meanwhile, during the period May 2019 – August 2019, interest rates in government bond markets had an upward trend, leading to a temporary reduction of the fund’s quota price/investment value. These certain volatilities that accompany an investment in bonds can only result in a temporary reduction of the rate of return for the investor. If the investor stays in the fund throughout the maturity of a bond, he will earn a return rate equal to the coupon that is fixed and reinvest the coupon with the market rates that have resulted during the bond time. Let us take an example to illustrate the situation explained above:
An investor who has invested an amount of 20,000,000 Lekë on 31.03.2019 in the Credins Premium fund. During the periods January 2019 – April 2019 and September 2019 – February 2020, interest rates in the government bond and bond markets had a downward trend, leading to an increase in the fund quota price/investor investment value. Meanwhile, during the period May 2019 -August 2019, interest rates in government bond markets tended to increase, leading to a temporary reduction of the fund’s quota price/investor investment value. Let us study the returns of the investor referring to his two different behaviors:
- The investor sells his shares on 30.07.2019 (when the price is decreasing) and re-enters the fund on 30.11.2019 (when the price is increasing). Until the middle of February 2020, the value of his investment will be 20,057,621 Lekë.
- Our investor is patient and stays invested in the fund. Until the middle of February 2020, the value of his investment will be 20,166,872 Lekë.
