Investment funds in Turkey: Their characteristics and advantages

What are investment funds?

A mutual investment fund is a non-incorporated pool of investment assets, established by portfolio management companies with specific regulations and laws for participation, in order to operate a portfolio on behalf of savers based on fiduciary ownership, with money or other assets collected from savers in exchange for their participation shares.

Investment funds in Turkey form an investment portfolio managed by specialized experts who conduct studies on the best companies to invest in to ensure the best possible returns, according to specific strategies and objectives set by the fund manager.

Investment funds aim to pool capital from investors wishing to join a fund in order to achieve investment advantages and profits that businesspeople cannot achieve individually, given their limited available resources.

Overview of investment funds in Turkey

Each investor participates in investment funds in Turkey by purchasing a share representing a portion of the fund's owned portfolio. Savers can evaluate their savings by purchasing partnership shares from intermediary companies, institutions, or stock exchanges. However, investing in securities requires knowledge and experience in Turkey's diverse financial markets.

Companies managing an investment fund in Turkey must establish one of the "umbrella fund" types. Depending on the securities to be included in the investment funds, different types of umbrella investment funds are determined. The most notable of these funds are:

• Umbrella equity fund: umbrella funds that invest at least 80% of the fund's total value continuously in shares of local or foreign issuers.
• Umbrella precious metals fund: umbrella funds that cover gold and other precious metals traded on the stock exchange and funds invested in capital market instruments based on precious metals.
• Umbrella basket fund: umbrella funds consisting of partnership shares in other funds and exchange-traded funds.
• Umbrella money market fund: umbrella funds whose portfolios consist entirely of highly liquid funds and capital market instruments with a maximum maturity of 184 days and an average portfolio maturity of no more than 45 days, calculated daily.
• Umbrella participation fund: umbrella funds whose portfolios consist entirely of lease certificates, participation accounts, partnership shares, gold and other precious metals, non-interest-based funds, and capital market instruments deemed appropriate by the board.
• Umbrella variable fund: umbrella funds that do not fall under any of the above types due to portfolio restrictions.
• Umbrella free fund: umbrella funds whose participation shares are created solely for sale to qualified investors.

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General characteristics of investment funds in Turkey

Investment funds in Turkey have the following characteristics:

• The capital, i.e., savers' money, is managed by professionals with expertise in portfolio management.
• Risks can be reduced due to the diversity of securities that can be included in the mutual investment fund portfolio, using instruments such as fixed income, foreign currencies, indices, and stocks.
• Since the evaluation and monitoring of securities, collection of coupons, interest, and dividends are handled by the fund management, investors are relieved from time- and resource-consuming tasks such as tracking maturity and collection.
• Allows investment in high-yield securities that cannot be achieved with small savings.
• Since the increase in the value of the fund portfolio is reflected in the portfolio value on a daily basis, investors can convert their investments in the fund into cash as needed.
• Saves a significant amount of time and money through portfolio purchase and sale operations.

Feasibility of investing in investment funds in Turkey

The price of participation in the fund is calculated by the founder every business day. The following procedure is followed in the calculations:

• On the valuation day, the value of the fund portfolio is calculated by considering the prices formed in the stock exchanges, where the assets in the portfolio are traded, bought, and sold.
• The total value of the fund is determined by adding the fund's receivables to the value of the fund portfolio and deducting its debts.
• The unit share price is obtained by dividing the total value of the fund by the number of outstanding shares on the valuation day.

Returns of investment funds in Turkey

The returns of investment funds in Turkey are generally related to exchange rate fluctuations and inflation rates, but the expected profit returns that can be achieved through investment funds in Turkey can be estimated by the following example:

If you invest 100 Turkish lira in a fund with a unit participation fee of one Turkish lira, you can get 100 shares.

If the total share value of the fund drops to 0.9 Turkish lira (because the value of the fund portfolio has decreased), you still have 100 shares, but your investment value has now dropped to 90 Turkish lira.

If the participation fee rises to 1.1 Turkish lira, your investment value also rises to 110 Turkish lira. (This example assumes no trading commission.)

It should be noted that during the execution of the above transactions, interest, dividends, trading gains, and daily value increases obtained from the assets in the fund portfolio are recorded as fund income on the same day, and thus reflected in the daily calculated share price of the participation shares. In this way, an investor who leaves the fund on a specific date receives his share of the fund's profit (or loss) up to that day.

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Risks of participating in Turkish investment funds

Since the value of the securities purchased by the fund may rise or fall, these funds may lose some of the capital you invest. Therefore, the risk factor is always present when you invest in a mutual investment fund.

However, not all mutual funds are at the same risk level; some funds carry significant risk, while others have lower risk.

The most important measure that can be used to determine the risk value for investment funds is the investor information form. This also means the possibility of high potential returns or high losses, i.e., high risk.

Of course, all types of Turkish investment funds involve varying degrees of risk, and the same applies to capital markets—they are not exempt from this general risk factor. Therefore, a registration system has been established to show the risk level of Turkish mutual investment funds, through which investors are informed of these risk rates.

Accordingly, the registration system to show this risk level was determined by the Capital Markets Board and ranges between numbers 1 and 7. The number 1 in the registration system indicates the lowest risk level, while the number 7 indicates the highest risk level.

Investors wishing to purchase mutual investment funds can find out the risk level of the funds and invest according to their own risk preferences.

How to participate in Turkish investment funds?

To participate in Turkish investment funds, you must have a participation certificate in a mutual investment fund. With this document, you can become a partner in the investment fund portfolios, as it only gives you the opportunity to transfer your savings to the fund and earn profits from transactions within the fund. You cannot trade the participation certificate in the mutual investment fund.

Do investment funds in Turkey qualify for Turkish citizenship?

According to the amendment published in the Official Gazette on 6/1/2022, number 31711, in clause (e) of the second paragraph of Article 20 of the regulation on the implementation of the Turkish Citizenship Law, foreigners can exceptionally obtain Turkish citizenship when participating in a real estate investment fund share or project with a value of not less than 500,000 US dollars or its equivalent in foreign currency, as determined by the Capital Markets Board, provided that the participation share in the investment fund is held for at least three years and sold to the Central Bank of Turkey.

It should be noted that Gars Consulting (a company of the Imtilak Group) offers services for obtaining Turkish citizenship by acquiring shares in various investment funds in the Turkish capital markets.

Edited by: Imtilak Real Estate©

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