The ABC of Evaluating Funds
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.