Mutual Fund Investment: Sweden's Guide To Getting Started

Sweden has a large mutual fund market, with seven to eight in ten adult Swedes saving in investment funds. The market is characterised by effective consumer protection, high transparency, lower fund charges than in other EU countries, and a high level of maturity in the sustainability sphere. The Swedish economy is the world's 24th largest by nominal Gross Domestic Product as of 2022 and is characterised by a large social safety net, a heavy focus on exports, and a mix of public and private enterprise ownership. Motor vehicles, machinery, and paper products are key exports. In this paragraph, we will explore how to invest in mutual funds in Sweden.

The benefits of investing in mutual funds

Sweden has become a world leader in fund saving, with eight out of ten Swedes saving in funds. This popularity may be due to the benefits that mutual funds offer. Here are some of the advantages of investing in mutual funds:

Risk Diversification

Mutual funds pool money from different investors and invest in various financial securities like stocks, bonds, company shares, debts, and other assets. This diversification helps to spread the risk. While individual stocks are subject to company risk, sector risk, and market risk, mutual funds are only exposed to systematic or market risk.

Smaller Capital Outlay

Mutual funds allow investors to start investing with relatively small amounts. The pooling of money in mutual funds means that investors can own a diversified portfolio of stocks with a much lower capital outlay compared to building such a portfolio individually.

Investment Expertise

Investing in stocks and bonds requires significant expertise and experience in financial markets, industry sectors, and individual companies. Mutual funds are managed by professional fund managers who have the necessary qualifications and expertise to make informed investment decisions, increasing the likelihood of better risk-adjusted returns.

Economies of Scale in Transaction Costs

Due to the large volume of securities bought and sold by mutual funds, the transaction costs per unit are much lower than what individual investors would incur when buying or selling shares through stockbrokers.

Variety of Products and Investment Modes

Mutual funds offer a range of products, such as equity funds, hybrid funds, debt funds, liquid funds, and tax-saving schemes, allowing investors to choose options that align with their risk profiles and investment objectives. Additionally, mutual funds provide flexibility in terms of investment and withdrawal modes, including lump sums, systematic investment plans (SIP), systematic transfer plans (STP), and systematic withdrawal plans (SWP).

Liquidity

Open-ended mutual funds offer high liquidity, allowing investors to redeem their units usually on a T+3 (transaction date plus three days) basis. Some funds, such as liquid, overnight, low-duration, and ultra-short funds, can even be redeemed on a T+1 day basis.

Transparency

Mutual funds provide transparency to investors by disclosing their Net Asset Values (NAVs) at the end of each business day. This allows investors to be aware of the market value of their mutual fund units daily. Additionally, mutual funds publish Monthly Fund Factsheets, disclosing portfolio holdings and providing information on returns, risk ratios, and other relevant details.

Tax Advantages

Mutual funds offer tax benefits that vary based on the type of fund and the tenure of investment. For example, in some countries, short-term capital gains in equity funds are taxed at a lower rate, while long-term capital gains may be tax-exempt or taxed at a reduced rate.

Long-term Growth Potential

Mutual funds aim to generate long-term returns for investors. By investing in a diverse range of securities and following sustainable and responsible investment practices, mutual funds have the potential to provide better growth for your savings over time compared to a traditional savings account.

How to choose a mutual fund

When choosing a mutual fund to invest in, there are several factors to consider. Firstly, it is important to understand the different types of funds available in Sweden. Mutual funds in Sweden typically invest in a range of asset classes, including equities, fixed income, commodities, and alternatives, with equities being the most common asset class. These funds can be indexed or actively managed.

It is crucial to evaluate the fund's investment mandate and objectives to ensure they align with your financial goals and risk tolerance. Consider the fund's investment strategy, the types of assets it invests in, and the level of risk it takes on. Look at the fund's historical performance, but keep in mind that past performance does not guarantee future results.

Additionally, pay attention to the fees associated with the fund. Mutual funds typically have expense ratios that cover management fees, distribution fees, and other expenses. Compare the fees across different funds to find the most cost-effective option.

It is also essential to assess the fund's level of transparency and consumer protection. The Swedish mutual fund market is known for its high transparency and effective consumer protection, so look for funds that provide clear and detailed information about their investments, performance, and fees.

Finally, consider the sustainability and social impact of the fund. The Swedish market has a high level of maturity in the sustainability sphere, so you may want to choose a fund that aligns with your values and contributes to social growth. Look for funds that prioritize sustainable and responsible investing and actively participate in corporate governance to generate optimal returns while considering sustainability and risk.

The history of mutual funds in Sweden

The 1950s:

In 1958, Sweden's first funds were launched by two brothers, Ragnar and Gösta Åhlén. Heirs to the mail order firm, Åhlén & Holm, and the department store chain, Tempo, the brothers drew inspiration from the United States, where fund saving had seen a sharp increase in the 1940s.

The 1960s:

By 1968, the total net assets of funds in Sweden had reached SEK 136 million. During this decade, the Swedish government demonstrated a positive attitude towards equity funds. In 1960, the Swedish Bank and Stock Exchange Inspection Board expressed support for initiatives that expanded share ownership and facilitated enterprise financing.

The 1970s:

The 1970s marked a significant shift towards state supervision of mutual funds in Sweden. In 1963, an equity fund commission was appointed, and its report submitted to Parliament in 1969 led to the proposal that fund management companies should be licensed and supervised by the Swedish Financial Supervisory Authority. This resulted in the adoption of Sweden's first Mutual Funds Act in 1974.

The 1970s and 1980s:

Tax-save funds were introduced in 1978, offering tax deductions and tax-free returns on savings in Swedish equities. The popularity of these funds grew rapidly, with the number of savers increasing from 75,000 to 425,000 between 1979 and 1982.

The 1980s:

The "Allemansspar" public savings programme was introduced in 1984, providing an alternative savings option without income tax deductions but with completely tax-free returns. By 1990, there were 1.7 million "Allemansfonder" accounts, even after the elimination of tax subsidies in 1997.

The 1990s:

The 1990s witnessed a push for harmonised EU regulations, leading to the implementation of the UCITS rules (Undertakings for Collective Investments in Transferable Securities) in Sweden in 1991. This period also saw the emergence of unit-linked insurances, enabling savers to invest in endowment or pension insurance and move their money between different funds without incurring tax on capital gains.

1994 onwards:

In 1994, the Individual Pension Saving (IPS) system was introduced, offering private individuals opportunities for deductible investments in funds, equities, or bank accounts. Additionally, a new Swedish public pension system was approved, allocating 2.5% of salaries to the premium pension, where savers could invest their money in funds. As a result, all Swedes with an income born since 1938 became fund savers.

Today, Sweden is a world leader in fund saving, with eight out of ten Swedes choosing to save in funds. The popularity of fund saving in Sweden can be attributed to the milestones and developments outlined above, which have made it a nation of fund savers.

The Swedish fund market today

Sweden has the highest proportion of fund savers in the world. Eight out of ten Swedes save in funds, and this number rises to 100% when mandatory premium pension savings are included. Funds have been a natural part of Swedish households' private savings since the mid-1980s, when the "Allemansfonder" public savings programmes were launched. Today, funds help secure people's future post-retirement livelihoods and act as a natural building block in every element of the pension system.

The Swedish fund market is characterised by effective consumer protection, high transparency, lower fund charges than in other EU countries, and a high level of maturity in the sustainability sphere. Funds' share of the equities listed on the stock market has doubled over the past 25 years, from 6% to 12%. This means that one in every eight Swedish krona invested in the stock market is owned by fund savers. If foreign fund management companies' shares are included, this percentage is even higher, making fund savers one of the stock market's biggest ownership groups.

Fund-based saving is an important component of both corporate and state financing in Sweden. It enables investments in innovation, development, and welfare, and thereby helps create both job opportunities and growth. As owners, the fund management companies can contribute to corporate development. Active corporate governance is part of generating the optimum return for savers in line with the fund's investment orientation, risk, and sustainability profile.

Sweden has a highly competitive investment fund market, with a diverse range of operators. However, there has been a decrease in the number of Swedish fund management companies in recent years, due to increasingly complex regulatory systems that have a greater impact on smaller companies.

The tax implications of investing in mutual funds

Sweden introduced mutual funds in 1958, and they have since become the most popular savings format in the country. The Swedish government has also actively encouraged this trend through various tax incentives.

The first tax-saving funds were launched in 1978. These funds were only allowed to invest in Swedish equities, but they offered a 20% tax deduction against income tax for every krona saved. The tax deduction was raised to 30% in 1980, and the returns were tax-free for six years. This scheme was replaced in 1984 by the "Allemansspar" public savings programme, which offered similar tax-free returns without the tax deduction.

In 1991, the introduction of Undertakings for Collective Investments in Transferable Securities (UCITS) rules in Sweden enabled cross-border fund trading and subsequent development of funds with different geographic and sectoral orientations. This meant that Swedes could now invest in foreign shares, which had previously been hindered by currency regulations.

In 1994, the Individual Pension Saving (IPS) scheme was introduced, offering private individuals the opportunity to make deductible investments for private pension savings in funds, equities, or bank accounts. The deductibility of IPS was, however, abolished in 2016.

In 2012, the Investment Savings Account (ISK) was introduced to stimulate saving in funds and equities. There is no tax on capital gains in ISKs; instead, the saver pays an annual standard rate of tax. Most fund savers in Sweden now choose to save through investment savings accounts.

It is important to note that individuals resident in Sweden are taxed on capital gains realised during the period of residence. Investment income and capital gains are normally taxed at a 30% flat rate. However, there are specific rules for certain types of investments, such as the sale of real estate and apartments, personal assets, and foreign currency exchanges, which may have different tax rates and deductions.

Frequently asked questions