The ABC of Eval­u­at­ing Funds

The Pak Banker - - Front Page - Fred­eric de Melker

ON a daily ba­sis, ev­ery­body is busy cop­ing with the chal­lenges of life. We are ab­sorbed by work, fam­ily and so­cial in­ter­ac­tions. Mean­while, our money screams for at­ten­tion as well. If it fits your risk pro­file, mu­tual funds are a solid in­stru­ment to take part of that pres­sure away. Hir­ing a group of fund man­agers to run your port­fo­lio is a good al­ter­na­tive to go­ing on the stock or bond mar­ket your­self. They pro­vide you with mar­ket ex­per­tise. They are able to fil­ter the in­for­ma­tion that goes around, and most im­por­tant, they in­tro­duce a nat­u­ral di­ver­si­fi­ca­tion among the hold­ings in your port­fo­lio.

But what is a good fund man­ager? And how can you com­pare fund man­agers?

At least two doc­u­ments can help an­swer these ques­tions. Ev­ery fund has a prospec­tus. This for­mal le­gal doc­u­ment pro­vides you with de­tails about the fund's strate­gies and ob­jec­tives, the man­ager's back­ground, fee struc­tures and fi­nan­cial state­ment. This com­pre­hen­sive file is reg­is­tered with a reg­u­la­tory body to en­sure the con­tent is in line with the law and rel­e­vant reg­u­la­tions.

An­other more ac­ces­si­ble monthly pub­li­ca­tion is the fund fact­sheet. This two-page re­port gives you a crisp over­view of how your in­vest­ments are do­ing. Con­se­quently, this doc­u­ment helps you to com­pare funds oper­at­ing in the same space. Know­ing that there are ten of thou­sands of funds reg­is­tered all over the world, the fund fact­sheet is one of the in­stru­ments that sep­a­rates the wood from the trees.

How should you read a fund fact­sheet? Over­all, this doc­u­ment con­tains four main chap­ters: fund in­for­ma­tion, port­fo­lio in­for­ma­tion, fund per­for­mance and the dis- claimer sec­tion.

Fund in­for­ma­tion: This con­tains the in­vest­ment ob­jec­tive. There are var­i­ous op­tions like growth, in­come or cap­i­tal preser­va­tion. Here, one de­scribes to what ex­tent the ob­jec­tive is met. Other than this, you find ad­min­is­tra­tive and reg­is­trar de­tails. Im­por­tant el­e­ments are the ta­ble of charges, the fund size and the base cur­rency.

Port­fo­lio in­for­ma­tion: This makes your fund trans­par­ent and con­tains a snap­shot how your money is spread. It pro­vides you with a drop­down of the as­set classes, sec­tors or ge­ogra­phies that your cap­i­tal is in­vested in. A 'top hold- ings' list shows the port­fo­lio con­cen­tra­tion and the broad­ness of the funds ex­po­sure.

Fund per­for­mance: Per­for­mance mea­sures track how your fund is do­ing. The ba­sis of this val­u­a­tion is the Net As­set Value (NAV) which rep­re­sents the fund's mar­ket price, sub­ject to a pos­si­ble sales or re­demp­tion cost.

This value is the dif­fer­ence be­tween the fund's as­sets and its li­a­bil­i­ties. A ta­ble in this sec­tion shows a cu­mu­la­tive per­for­mance as a to­tal re­turn over a cer­tain fixed pe­riod.

An an­nu­al­ized per­for­mance is the equiv­a­lent year-on-year re­turn over the pe­riod shown. The rel­a­tive per­for­mance de­scribes the evo­lu­tion of the fund com­pared with its bench­mark. You will also find the volatil­ity mea­sures. These quan­ti­ta­tive cal­cu­la­tions ex­press the risk an in­vestor takes ver­sus the cho­sen bench­mark.

Dis­claimer in­for­ma­tion: Al­though the small print is eas­ily skipped by the reader, this sec­tion con­tains im­por­tant in­for­ma­tion. Gen­er­ally it holds the source of data shown, cal­cu­la­tion method­ol­ogy and ap­pli­ca­ble risks. It is cer­tainly worth­while to have a look be­fore you sign up.

The fund fact sheet con­tains im­por­tant in­for­ma­tion about the scheme. Al­though it is prob­a­bly im­prac­ti­cal to go through all pos­si­ble funds in your reach, your fi­nan­cial ad­vi­sor can pro­vide you with a short­list of port­fo­lio man­agers based on your bank's anal­y­sis. In line with your in­vest­ment pro­file, your ad­vi­sor can guide com­bin­ing the right prod­ucts to es­tab­lish a port­fo­lio that fits your needs. Never for­get that only a well in­formed in­vestor will be suc­cess­ful over time.

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