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Pension expert: how far can index funds root themselves in Latvian pension plans?

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULatvian pension plan clients can still pick existing pension plans with sufficiently flexible deposit policy and possibilities to receive consultations. It should be added, however, that pension plans based on index funds can find clients in Latvia for whom low-price guarantees is important the most, Nordea Pensions Latvia board member Ilya Arefjevs predicts.

Pension experts say topics regarding index funds and so-called passive deposit management approach come up more and more often. Index fund or ETF (exchange traded funds) is an investment fund that freely trades on the exchange and reflects specific index components. Results from index funds directly reflect the market’s results, he explains.

Arefjevs continues: «The biggest advantage from index funds is their low cost, because reaching the intended profitability goal requires managers to perform few actions on the securities market with low commission fees. This is why index funds with passive deposit management approach are popular the most among private investors for whom low-cost guarantee and transparency of the product on display is important the most.»

In addition, investors want to be independent in the choice of funds and decisions – when to buy and when to sell. Because of this reason, it should be conclude that the majority of private investors may find index funds inappropriate because it is more important for them to receive advice on how to best allocate their finances, the expert says.

«In regards to the application of index funds on Latvia’s private investors and Latvia’s pension plans, several other important factors should be mentioned,» says the pension expert, adding:

Investments in Latvia or at least Baltics

Investments in Latvia can be different – starting from government bonds and ending with venture capital funds. Investments in Baltic companies with a good money flow are becoming more and more popular. They are not only secure but also offer high yield under low interest rate conditions, Arefjevs says.

Risk limitation

In relation to the most important factor, the expert says: ‘Hedging against different kinds of negative events, such as negative currency exchange fluctuations, interest rate changes, stock market declines, etc. Insurance of this kind generates costs in exchange for reduced pension plan investment risk.’

Socially responsible investments experience growing popularity

Socially responsible investments are no longer a fad, more of an active trend. It should be said there are no unified criteria for the term socially responsible investments. Nevertheless, it can be safely said that any socially responsible investments are associated with larger short-term costs that will provide long-term returns thanks to longevity of investment objects.

«In conclusion, many Latvian pension managers use passive index funds in their portfolios, sometimes forming a significant portion. But index funds with passive investment management approach exclude investments in Latvia or Baltics, investment insurance against different financial market risks, as well as socially responsible investments,» the pension experts notes about the situation.

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