What are mutual funds?

A mutual fund is a financial instrument where many people pool their money to invest collectively. Imagine pooling money with friends or family for a common goal: everyone contributes a certain amount, and that money is managed by someone with expertise for everyone's benefit. Similarly, in a mutual fund, the resources of multiple investors are combined into a common fund, which is managed by financial professionals. Each investor owns a proportional part of the fund, represented in shares (also called units or shares of the fund).

The mutual fund works like this: the managers (experts who manage the fund) make decisions about where to invest the collective money according to the fund's strategy and objectives. They can invest in various financial assets such as company stocks, bonds (government or corporate debt), real estate, and even a combination of them, depending on the type of fund. For example, a fund could allocate money to buy shares of many different companies, acquire government bonds, or a mix of both. By diversifying the fund's investments, they seek to balance risks and returns.

Each investor in the fund owns shares that represent their part of the total assets. The value of these shares changes daily based on the performance of the fund's investments. If the investments do well (for example, stocks go up or bonds pay interest), the value of the shares increases, meaning your money grows. If they perform poorly, the value of your shares may decrease. The advantage is that, with all the money pooled together, even a small contribution allows you to be invested in a diversified portfolio that would be difficult to replicate on your own.

In summary, a mutual fund is a collectively and professionally managed way to invest. Investors contribute their money to a common fund, a specialized manager makes investment decisions, and each participant obtains the proportional benefits (or losses) based on the amount they invested. This structure facilitates access to investment opportunities for people with little knowledge or capital, which individually would require much more money or dedication.

Advantages of mutual funds

Investing through mutual funds offers numerous benefits for the average investor. Here are the main advantages of this financial vehicle, which have made it very popular:

• Diversification: By investing in a fund, your money is distributed across different instruments and issuers. That is, you don't “put all your eggs in one basket.” For example, instead of buying only the shares of one company, with an equity fund your money is spread across dozens or hundreds of companies. This diversification reduces risk, as if one investment goes wrong, it can be offset by others that go well. Even debt funds invest in many different bonds. Achieving such a diversified portfolio on your own would require a lot of capital; instead, the fund makes it possible by pooling the resources of many.

• Professional management: Funds have professional managers backed by teams of analysts and experts in financial markets. They analyze the economy, companies, and market trends to make informed decisions about the fund's investments. For you as an investor, this means that someone with experience is managing your money. You don’t need to be a financial expert to invest, because you delegate those decisions to professionals whose daily task is to seek the best opportunities and manage risks. This provides peace of mind, especially to those who don’t have the time or knowledge to constantly monitor their investments.

• Access to global markets: Through mutual funds, you can access opportunities in different markets and sectors worldwide, something that would be complicated individually. For example, you could invest in an international fund that buys stocks in the United States, Europe, or Asia, or in a fund that invests in global real estate, commodities, etc. Funds open the door for you to invest beyond your locality, leveraging the global reach of large managers. With relatively small amounts, you participate in foreign markets that would otherwise require a lot of money and paperwork to enter.

• Transparency: Mutual funds are regulated by financial authorities. These regulations require high standards of transparency and investor protection. Before investing, you have access to a prospectus or informational brochure of the fund, which details its objective, what it invests in, what risks it has, the fees it charges, performance history, etc. Additionally, the fund manager must provide you with periodic information on how the fund is doing: the value of your shares, obtained returns, strategy changes, etc. In other words, you know where your money is and how it is being managed.

• Liquidity: Most open mutual funds allow you to withdraw your money relatively easily. If at any time you need to access your investment, you can sell (redeem) your shares and receive your money back, generally within a short period (for example, in 24 to 72 business hours, depending on the fund and institution). This makes funds quite liquid compared to investing directly in, say, real estate or fixed-term deposits with early withdrawal penalties. Although it is recommended to invest medium or long-term, knowing you can exit the fund when needed provides flexibility.

• Accessible investment: Contrary to the myth that “you need to be rich to invest,” funds usually have very affordable minimum entry amounts. You can start with small sums. This democratizes investment, as practically anyone can participate. For example, instead of requiring $50,000 to buy a variety of stocks on your own, a fund may allow you to enter with a much smaller amount and be proportionally invested in the same variety. Additionally, you can make additional contributions gradually to grow your investment over time.

• Simplicity: Investing in a fund is relatively straightforward. Once you choose the fund that suits your goals, investing is as easy as buying shares through your bank, brokerage firm, or financial platform of your choice. You don’t have to worry about buying and selling many individual assets or conducting complex analyses; the fund does that for you. For the investor, this translates to convenience: with a single decision (choosing the fund), you’re getting a complete portfolio. The information about your investment is consolidated in one account statement, making it easy to track your results. In summary, it’s a way to invest without complicating life with extensive procedures and research on your own.

Classification by fund type and risk profile

Not all mutual funds are the same. There are different types of funds based on the assets they invest in and the level of risk they entail. When choosing a fund, it’s important to know its category, as this will give you an idea of what to expect in terms of volatility (value fluctuations) and potential return. Below, we describe the main classes of funds and their associated risk profiles:

• Fixed income funds: Also known as fixed income funds, they primarily invest in debt instruments, such as government bonds (example: Treasury Bonds) or corporate bonds from companies. These instruments pay interest and have maturity dates. Fixed income funds are generally considered low risk compared to other types of funds, as bonds offer more stable and predictable returns. The main goal is to preserve capital and achieve moderate returns. They are ideal for conservative investors or short to medium-term goals. However, although the risk is lower, they are not entirely risk-free: the fund's value may fluctuate with interest rate changes or if a debt issuer defaults.

• Equity funds (stocks): These funds invest in stocks of companies, that is, in the stock market. They are called “equity” because stocks do not guarantee a fixed payment; their return depends on the company and market performance. They have a high risk profile but also a higher potential for long-term profitability. They may focus on a specific index (for example, the S&P 500 in the US) or on diverse sectors and regions. Stock prices can rise and fall significantly in the short term, so these funds are more volatile. They are usually recommended for aggressive investors seeking long-term capital growth and who are willing to tolerate ups and downs along the way.

• Mixed funds (multi-asset): As the name suggests, they combine fixed income and equity in a single portfolio. Mixed funds invest both in bonds and stocks (and sometimes in other assets), seeking a balance between risk and return. There are different types of mixed funds depending on the proportion of stocks vs. bonds; for example, some may be “moderate” with 50% in stocks and 50% in bonds, others more conservative with perhaps 20% stocks and 80% bonds, or vice versa. The risk profile of a mixed fund is medium, as it is halfway between the stability of debt and the volatility of stocks. They are a good option for moderate investors or those looking for a “one-stop” diversified solution. They can also serve medium-term goals or those who want growth but with some protection against major market downturns.

• Thematic or sectoral funds: These are equity funds (in many cases) that focus on a specific economic sector or particular theme. For example, there are funds for the technology sector, healthcare, energy, or themes such as investments in green/sustainable companies, innovation, real estate, etc. The idea is to invest in a set of companies linked by that theme. The risk profile of these funds varies depending on the theme, but generally by concentrating on a sector they can be risky (because if that particular sector does poorly, the whole fund is affected). However, they allow the investor to bet on areas of interest or with high growth potential. They are suitable for complementing a diversified portfolio, but perhaps not as the sole investment, given their lower diversification due to being concentrated in a specific area.

• Hedge funds: We mention this type briefly for a complete overview. Hedge funds have more flexible and sometimes complex strategies. Unlike traditional funds, they can use leverage (borrow to invest more), take positions in derivatives, short sell (bet on the decline of assets), and other advanced tactics. Their goal is usually to achieve the highest possible return even in adverse market conditions. Their risk profile is high or very high, and due to regulations, they are usually available only to institutional investors or high-net-worth individuals. For the average investor just starting, hedge funds are not a typical or necessary option; they are more of an advanced level of investment.

Who are they recommended for?

Mutual funds can be adapted to different investor profiles and various financial goals. Before choosing a fund, it's important to consider what type of investor you are and what your objectives are, as that will determine the most suitable type of fund for you. Broadly speaking, investor profiles are usually classified as conservative, moderate, and aggressive, each corresponding to different needs:

• Conservative investor: Prefers security over profitability. If you consider yourself conservative, you probably seek to preserve your capital above all, even if it means achieving modest gains. You are uncomfortable with strong fluctuations in your investment and might need liquidity in the short term. For this profile, low-risk funds are recommended, such as fixed income funds or some money market funds. These funds tend to have more stable returns and lower variations. A conservative investor typically has objectives like maintaining an emergency fund, saving for an upcoming expense, or simply not taking unnecessary risks with their savings.

• Moderate investor: Looks for a balance between growth and security. If you’re moderate, you’re willing to take some risk to achieve better returns than just debt would offer, but you wouldn't dive into maximum risk. You tolerate some volatility in the value of your investments, understanding that it's part of the process to achieve growth, but you seek to limit large potential losses. For this profile, mixed funds or a combination of fixed income and equity funds may be appropriate. Your goals might be medium to long-term, like saving for your children's education, accumulating wealth for a future project, or growing your savings above inflation but without extreme volatility.

• Aggressive investor: Prioritizes long-term capital growth and is willing to tolerate risks and variability in the short term. If you’re aggressive, you understand that the most profitable investments often come with greater uncertainty, and you're willing to see pronounced ups and downs in your portfolio's value to achieve superior returns over time. This profile typically invests mainly in equity funds and even in specialized or thematic funds with high potential. The usual objectives of an aggressive profile are long-term, like building a substantial retirement fund, generating significant wealth, or simply maximizing gains because you don’t need that money in the near future. Although the growth potential is higher, an aggressive investor must be aware that they could face significant temporary declines and need to have patience and discipline not to panic in the face of volatility.

In practice, many people do not fit 100% into a single rigid category; you might consider yourself moderate with a conservative tendency, for example. Additionally, the profile can change with age or situation: perhaps when young you are aggressive looking to grow your wealth, and as you approach retirement age, you become more conservative to protect what you’ve accumulated. The important thing is to identify your risk tolerance and objectives (the time you will need the money, the target amount, etc.) to choose suitable funds. Fortunately, the market offers a huge variety of funds that fit practically any profile and objective.

Key considerations before investing

Before placing your money in a mutual fund, it's worth analyzing some factors and doing your homework. While funds greatly simplify the investment process, it doesn’t mean we should enter blindly. Here are some key considerations you should keep in mind when deciding to invest in a specific fund:

• Fees and costs: Mutual funds charge fees for managing and administering your money. The most common are the management fee (an annual percentage on your invested money that the manager charges for handling the fund) and, in some cases, a performance fee (a percentage on profits if the fund exceeds a certain target) or purchase/sale fee (initial or exit load, though many funds no longer have them or are minimal). It's important to review costs because they impact the net return you receive. Look for funds with reasonable fees and justification for charging them (e.g., active management that adds value).

• Investment horizon: Ask yourself how long can I leave this money invested? The investment horizon is crucial for choosing the type of fund. If your goal is short-term (less than a year, for example, paying for a wedding, upcoming vacation, or an emergency fund), you probably prefer very conservative funds or those with daily liquidity. If your horizon is several years, you can assume more risk because you have time to recover from possible market downturns; in that case, equity or mixed funds might be suitable. Each fund usually indicates a recommended horizon (for example, “investment for 1-3 years,” “for more than 5 years”), use it as a guide. Investing with the wrong horizon can lead you to withdraw money at a bad time out of necessity, crystallizing losses that would have been temporary.

• Volatility and risk tolerance: Even within the same horizon, different funds have different levels of volatility. Volatility refers to how much your investment's value fluctuates in the short term. An international stock fund may vary several percentages in a single day, while a short-term bond fund may hardly move or do so very little. You need to be comfortable with the expected fluctuations of the fund you choose. If you know you'd get very nervous if your investment loses 10% in a month, perhaps a very volatile fund isn’t a good idea. Match the risk to your profile: conservatives choose low volatility, moderates medium, and aggressives can tolerate high volatility.

• Historical vs. future returns: It's very common to look at a fund's historical returns (e.g., “this fund gained 15% last year”). While history is useful, you must be cautious. A very important saying in finance is: “past performance is no guarantee of future results.” A fund that performed well in the past won't necessarily in the future, especially if market conditions change. When evaluating a fund, look at its consistency over long periods (3, 5, 10 years) and how it performed in challenging market times, not just the last year. Avoid choosing a fund solely because it's “trendy” or had exceptional recent performance without understanding why it did. Use historical performance as a reference, but also analyze the fund’s strategy, who manages it, and whether those gains come from something sustainable.

• Selection of the right fund: Finally, take time to research and compare the available funds before investing. Some points to review: the fund’s investment objective and policy (does it align with what you're looking for?), the risk profile, the fees (as mentioned), the manager's experience, and details like restrictions or penalties. Also consider the fund size and liquidity. Many investors find it useful to read expert commentary or analysis on certain funds, or even talk to a trusted financial advisor, who can recommend options according to your profile. Remember, the best fund for someone else isn’t necessarily the best for you; it all depends on your objectives and risk tolerance.

Practical example of how a fund investment works

To better understand the mechanics, let's look at a simplified example of an investment in a fund and how you could earn returns. Imagine you have $20,000 available and decide to invest it in a mutual fund. Suppose the fund “XYZ Global Stocks” has a value of $50 per share at the time of investment (this price per share reflects the fund's portfolio value divided among all its shares). With your $20,000, you buy 400 shares of the fund.

Throughout the first year, the fund's investments perform well: the stocks they invest in rise, and some pay dividends that are reinvested into the fund. As a result, the per-share value of “XYZ Global Stocks” increases from $50 to $55. What happened to your investment? Your 400 shares, initially worth $20,000, are now worth $22,000 in total. You just gained $2,000, equivalent to a 10% return on your original investment in one year.

If you decide to keep your money invested, the compound effect can further grow your capital. Continuing the example, suppose in a second year the fund grows another 10%. Now the per-share value would rise to approximately $60.5. Your same 400 shares would be worth $24,200, gaining an additional $2,200 that second year. Notice that the second year's gain ($2,200) was greater than the first’s ($2,000) despite the percentage return being the same (10%). This occurs because you're earning a return on an already increased amount from the previous year; that is, the profits are reinvested and generate more profits, known as compound returns.

Of course, in reality, returns aren't fixed or guaranteed. One year the fund could rise, another it might decrease somewhat depending on market conditions. This example illustrates that fund investments can fluctuate, but if the fund is good and the market grows long-term, your money tends to increase.

You can also make additional contributions or withdrawals. Following the story, suppose after the first year you decide to add another $10,000 to the fund, taking advantage that it went well. At that time, the per-share value was $55, so you buy approximately 182 additional shares. You would now own 582 shares. From then on, your returns will be calculated on that new total of shares. This example shows flexibility: you can increment your investment as you have resources, and the fund integrates them into the same diversified basket.

In summary, that’s how a fund operates: you contribute money, it becomes shares whose value reflects the managed portfolio's performance. Over time, that value can grow (or decrease), and you have the freedom to stay invested seeking long-term returns, add more money, or exit by selling your shares when you need liquidity.

Common myths about mutual funds

Although mutual funds are increasingly popular, some myths or misconceptions can discourage people from using them or create confusion. Let's clarify the most common myths:

• Myth: “Mutual funds are only for finance experts or wealthy people.”
  Reality: False. Funds were precisely created so that anyone can invest without being an expert or millionaire. Many funds allow investing with small amounts (even some platforms from small minimums) and you don’t need deep knowledge, as a professional manager makes the decisions. They are a suitable tool for beginners, small savers, and generally anyone looking to grow their money, regardless of financial experience level.

• Myth: “Investing in a fund guarantees I'll always make money.”
  Reality: Not true. No legitimate investment can guarantee profits all the time. Mutual funds invest in real markets (stock exchanges, bonds, etc.) that go up and down. There will be periods when your fund generates positive returns and others when it may have temporary losses. The important thing is understanding that funds, like any investment, involve risks. Handled properly and with diversification, they can mitigate risks, but never eliminate them entirely. Beware of anyone who paints funds as a sure gain; the reality is that they’re a good medium-long-term growth option, but with ups and downs.

• Myth: “It’s better to choose the fund that had the best performance last year; that way I’ll earn more.”
  Reality: Past performance doesn’t guarantee future returns. A fund that was stellar last year might have taken high risks or benefitted from exceptional circumstances that may not repeat. When choosing a fund, don't be swayed solely by recent performance. It’s more important the fund matches your profile and objectives and has a solid and consistent strategy over time. It’s often preferable a fund with good but consistent returns over several years, than one that was number 1 one year and then plummeted. In short: research the entire trajectory and philosophy of the fund, not just last year’s figure.

• Myth: “If I invest in funds, I can't easily withdraw my money, or it’s frozen.”
  Reality: Most mutual funds offer high liquidity. You can redeem (sell) your shares when needed, and generally, the money is back in your account in a few days. This is not like locking money away. Sure, there are funds with certain restrictions (for example, some specialized or real estate funds may have liquidity windows), but they’re the exception and informed beforehand. For common funds available to the public, you have flexibility. Remember, withdrawing at a bad market time can realize losses, but technically, your money isn’t “trapped”: you have control and access when required.

• Myth: “Investing in a fund is very complicated and hard to understand.”
  Reality: Initially, like any new subject, it may seem complicated to understand how mutual funds work. But essentially, as explained, it's not so difficult: pooling money from many for an expert to invest diversify. Today, financial institutions provide clear information, simplified brochures, and even advisors to guide you through the process. Plus, with technology, investing in a fund has become as simple as a few clicks on an app. You don’t need to calculate anything complex or go through cumbersome procedures. Once you take the step and understand the basic concepts, you’ll see that investing in funds is quite accessible and manageable for anyone.

Banorte Funds and Their Strategies

Banorte Funds offer a robust selection for every investor profile. Below are the most representative funds organized by type and strategy, valid until April 2025. Each fund is designed to meet specific needs for return, liquidity, and risk.

Debt Funds: Stability and Liquidity

• NTECT: a classic short-term fund that invests in Treasury bills and bank debt with an AAA rating. High liquidity, minimal risk.

• NTEDIG: a digital fund with a focus on daily liquidity and management through Banorte Mobile. Yields between 8-9% annualized with government and corporate debt.

• NTEDLS: debt in dollars with optional currency hedging. Designed for conservative profiles seeking diversification in foreign currency.

• NTEPZO: a minimum term fund of 91 days, ideal for those who can keep their investment for complete cycles and seek stable returns.

Equity Funds: Aggressive Growth

• NTEIPC+: replicates the S&P/BMV IPC index, investing in leading companies. High risk, ideal for the long term.

• NTEUSA+: stocks of US companies with high international exposure. Long-term growth with volatility.

• NTEESG: global stocks with ESG criteria. Combines sustainability with profitability for ethical and aggressive profiles.

Mixed Funds: Flexible Balance

• NTE1: up to 30% in equities and 70% in debt. Conservative, intended for moderate growth.

• NTE2: mixes 50% equities and 50% debt. Moderate, for those who tolerate some volatility with growth potential.

• NTE3: up to 80% in equities. Focused on capital growth with high risk.

• NTERT: an award-winning fund that dynamically adjusts between debt and equity depending on the economic environment. Winner of the Morningstar 2023 award.

Specialized Funds: Global Exposure

• NTEMXN: international debt ETFs in dollars with currency hedging. Sophisticated profile, minimum horizon of 3 years.

• NTE4: a multi-strategy fund with global debt and equity ETFs. International diversification with high growth potential.

Each fund follows a strategy designed to optimize performance according to market conditions. Banorte is ISO 9001 certified in investment processes, ensuring operational quality.

How to Invest in Banorte Funds

Investing in Banorte Funds is simple and accessible for all types of profiles. You can do it through Banorte Mobile, branches, or the online investment platform. Many funds allow you to start with as little as $50, making them ideal for new investors or those who want to try different strategies without committing large sums.

Steps to Start Investing

• 1. Open your account with Banorte (which can be digital).

• 2. Log into Banorte Mobile or the website and go to "Investments."

• 3. Complete your risk profile on the platform.

• 4. Explore the funds suggested for your profile and goals.

• 5. Make your first contribution starting at $50 or the minimum required by the fund.

Key Tips for Investors

• Choose debt funds if you're looking for liquidity and low risk.

• Explore mixed funds if you want returns without taking on all the risk.

• Opt for equity funds if you have a long-term horizon and tolerance for volatility.

• Diversify across various categories to balance risks and opportunities.

• Consult with a Banorte advisor if you need help selecting.

Banorte Funds combines digital innovation, national experience, and international exposure to help you build a solid, accessible, and strategic portfolio from anywhere.