Here we have already discussed investment funds and have already identified some of the most important features of this type of financial investment.
We have already published our Guide to Investment Funds, where we cover, in a general way, the existing commissions and the most popular types of investment funds in the market.
However, we never approach this topic in order to present tips and recommendations for choosing the best investment fund .
It is true that most bank clients and some beginners in this type of investment are fascinated by the profitability of some investment funds operating in the market. It is not very difficult today to find Investment Funds with net returns of more than 5%, being an attractive product for the majority of clients.
However, the Investment Funds have risk according to different classes, ie it is very easy to find investment funds in the market where the risk to the client goes from 1 (low risk) to 6 (high risk).
Investment funds are low risk most of the treasury funds, where the investment policy is conservative and a large part of the fund’s assets portfolio is composed of low risk products or even simple savings products such as time deposits . High-risk investment funds, on the other hand, have a more aggressive investment attitude, with a large part of the fund’s assets portfolio consisting of risky assets, such as stocks.
According to the risk of the portfolio of assets of the fund we have the returns, which may be negative or positive.
1st Important Tip – How to Handle Risk
As mentioned above, mutual funds are risky and may be low in some types of funds, but they are risky.
Any new investor before venturing into the world of investment funds should ascertain how he handles this risk. Putting simple questions about how you handle risk is critical.
Here are 3 simple questions you should look for:
- Do you prefer investment security?
- To be more profitable are you willing to take risks?
- Do you prefer balanced returns associated with balanced risks?
Depending on the answers you get, you will know what your risk profile is. Obviously you are not in three questions that will find your risk profile, however, if you respond positively to the first question and negatively the rest, then the investment funds are not for you. The affirmative answers to the remaining questions show that he is willing to take risks with the investment funds.
2nd Important Tip – Check the Consistency of Returns
This is intended to alert the reader to the fact that when choosing an investment fund, the simplified or general prospectus should be analyzed ( Document where all characteristics of the investment fund are present, namely, management entity, investment policy, commissions, taxation, wallet, among others ) to verify if the investment fund fits the objectives you want for your money and question the fund’s profitability over the last 5 years ( at least ).
If the investment fund has consistency in its returns, it means that the management entity has a well-defined strategy for the fund and that it seeks positive returns for the participants in the fund, that is, for the investors.
This is not to say that if one or two years of negative returns occur in a low yield investment fund. It should rather analyze whether the poor returns are offset significantly by the fund’s good returns. For example, there are funds that value market failures and funds that accompany the market and value whenever the latter is on the rise, if you analyze a fund that follows the market in a time of clear instability, then you will see significant declines in profitability. which does not mean that the fund will not have long periods of positive return as soon as the market shows signs of recovery.
Therefore, it is important to assess whether an investment fund has a positive return over a period of time, long enough for a better result, subtracting the negative returns from the positive ones.
3rd Important Tip – What Type of Commissioning Does the Fund Exist?
Analyzing the commissions on the investment fund may give us some tips on the fund’s potential for positive profitability.
As a general rule, the funds have different commissions, such as commission or subscription fees, management fees, deposit fees, transaction costs, redemption fees, performance fees.
When analyzing a simplified prospect where you will check commissions in the fund, you will find some of the commissions above. From my point of view, an investment fund with underwriting or entry commission does not give me any assurance that this fund will have a positive return in the future, since one of the profits of the managing entity is guaranteed with the entry of a new client.
However, if a fund has a performance fee, I can conclude that the management entity has every interest in having a positive return on the fund because its earnings come from the performance of the fund or the performance of fund managers.
There may be some opinions contrary to this type of analysis but I believe that if managers and managers themselves have their earnings conditioned to the performance of the fund then they will have every interest in having positive returns to earn more money. In the same way, a win-win strategy is created, that is, if the managing entity also wins the investors investors of the fund make money.
The management fee exists in many of the investment funds and does not tell us much about the potential for profitability, as it is considered that this commission occurs because there is a professional management of investment fund. The redemption fee only occurs if the client does not comply with the fund’s exit requirements, for example, a fund with a redemption commission up to the fifth year reveals that if there is a redemption before 5 years, there is a fee charge.
The redemption commission may arrest the client to the fund but it should not be an added problem as, as a rule, this is conditioned to the minimum recommended term of stay in the fund. For example, a treasury fund generally does not have a redemption fee because of the liquidity of the assets allowing the entrant to exit the fund at any time. Already the stock funds is common to have a redemption fee until at least 5 years, and the fund management entity believes that the term of 5 years will be an example of a positive profitability. If the fund participant intends to leave the fund, it may have to bear a significant burden and be penalized not only for the potential profitability but also for the invested capital.
4th Important Tip – Deadline Influences Decision
Investment funds definitely seek out investors who are aware of the risks they want to take and how long they are willing to take those risks. It is definitely acceptable for investment funds investing and higher risk assets, such as stocks, to require investors to spend more than 5 years on investment.
If you can not cope with the volatility of the investment fund then you should not look for funds that have recommended long terms. You should therefore look for funds that allow you to quit at any time.
However, it would be ideal to have an investment fund that had high potential for profitability in the short term and still allow investors to enter and exit the fund whenever they wish.
Unfortunately, I do not know of any such fund, all of them deserve monitoring and analysis of several parameters, such as those announced in the previous tips.
5 Extra Tip – Importance of Diversification
The very word diversification answers and clarifies what is intended. Of course, a diversified portfolio of mutual funds allows positive average returns, such as having the entire amount of investment divided by higher risk and lower risk funds.
Diversification should be made according to your risk profile. If you are unwilling to take increased risks then you should invest a large part of the capital in lower risk funds and a smaller part in higher risk funds. If you prefer higher returns, diversify according to the risk you are willing to take, investing most of the capital in higher risk investment funds.
It is obvious that it is difficult for the investor to find the right investment funds for a diversified portfolio because the supply of investment funds is immense and in some ways complex. Due to this complexity it is always advantageous to deliver this task to asset management companies, who at all times seek to create positive returns in the portfolios of their clients in the various existing investment funds.