For many investors in the Netherlands, the default place to hold savings is a bank deposit. Whether it’s a savings account or investing in bank products, returns could be below what some are looking for.
Alternatives are investment companies like Yieldfund, which provide higher returns, but very few know how to access them or know why they are good alternatives.
The idea is that they have different models: one offering modest annual returns tied to European Central Bank interest rates, and the other relying on deploying capital in markets with proven strategies.
Let’s explore the key differences between banks and investment companies from the perspective of Dutch investors and how they weigh against each other.
Misconceptions about returns
Banks have always been a preferred investment tool. That’s because they are easily accessible and have been integrated as the norm. Before you can become integrated in a society, you are required to have a bank account to pay taxes, purchase a phone, and even get a loan.
Investment companies, on the other hand, are seen as complex and out of reach. The common misconception is that they are difficult to deal with, require a high upfront cost, and the terms and language are difficult to understand. And the taxes. For new investors, it’s always unclear how and where they have to pay their taxes.
However, it’s essential to understand how both companies generate returns.
Banks in the Netherlands generate returns by lending out deposits. So what you actually deposit is then reallocated to other individuals. The bank offers clients an annual interest rate of 3%, while it charges up to 12% on short-term loans.
Investment companies allocate capital directly into the market using high-performing trading algorithms. Thus, their returns are driven by the performance of their trading strategies, asset allocation, and quantitative models, not by central bank rates.
The outcomes from investment companies are not related to monetary policy but to how well their strategies perform.
Comparing Annual Returns
In the Netherlands, people with capital see banks as the only option for investing. Dutch banks, or any bank for that matter, can offer returns of 1.5% to 3% per year on savings accounts. For example, we found that ING in the Netherlands offers up to 1.25% on traditional savings, but exceeding €10,000 only yields 1% interest.
By comparison, investment companies offer much higher interest rates because they are performance-driven. This means they rely on high-performing trading algorithms or strategies to outperform the market.
Data shows that moderate-risk strategies can deliver around 16% annually in traditional markets. That means that companies with higher yields for investors are within the norm but carry some risks.
Risks between investment companies and banks
How do the risk profiles compare between the two? All types of investing carry risks, whether it’s the risk of default, impermanent loss, or external factors affecting your savings.
Banks are regulated locally and overseen by the EU. In the Netherlands, banks are monitored by De Nederlandsche Bank (DNB), which works to prevent bank failures and protects deposits up to €100,000 per person. However, this means that no matter how much you’ve saved, the insurance on your funds is capped at this amount.
Investment companies, on the other hand, are regulated differently. In the Netherlands, they are overseen by the AFM, a government regulatory body. While the AFM doesn’t provide fail-safe mechanisms, it ensures companies disclose information, maintain transparent balance sheets, and comply with regulatory standards.
This means the risk profiles of both types of investments differ. In banks, they are more government-controlled, whereas in investing, they are required to be more transparent to investors.
Investment transparency
Banks and investment companies allocate capital differently.
When adding money to a savings account, banks don’t fully disclose to their clients how the money was spent, invested, etc. The underlying investment strategies are unknown.
Investment companies need greater transparency. This means they share their profits and losses with clients, inform them of their decisions, and provide an overview of how the company is performing.
Inflation vs. real returns
Inflation plays a crucial role for investors, as it determines whether they can stay profitable or simply prevent their capital from losing value.
For example, bank savings accounts often only yield enough to maintain purchasing power. In the Netherlands, inflation is around 2%, while the Eurozone average is 2.3%. Using a low-risk approach, such as savings accounts, barely keeps up with inflation.
In contrast, investment strategies aim to deliver real returns. With average annual returns of 16%, they significantly outperform inflation. However, these higher returns come with additional risks, such as underperforming markets or strategies that fail to meet expectations, which could lead to losses.
Investors must define their goals: do they aim to preserve the value of their money with minimal risk, or to grow their capital and generate profit?
Choosing the right investment tool
In the Netherlands, banks and investment companies are not competing with one another. They all serve different purposes, and it’s essential to understand how capital can be allocated.
Investors can use both avenues to diversify their holdings and have controlled exposure to the market. Banks could be suited for capital preservation, especially on high-performing savings accounts, liquidity, and short-term needs.
On the other hand, investment companies like Yieldfund or similar entities with exposure to crypto, stocks, or other markets are designed for capital growth, diversification, and long-term objectives.
