The concept of mutual funds is gradually accepted by the public. The number of SFC authorized funds has reached more than 2,000. How should investors choose a fund that suits them most? When selecting a fund, investors can consider from two major dimensions, which are personal factors and the characteristics of funds.
On the personal factors, investors should understand their investment objectives, risk tolerance and their existing portfolios.
- Investment objectives
There are three main investment objectives, which are capital growth, stable income and capital preservation. Investors with an investment objectives of capital growth can choose growth funds, but the risk of this type of fund is generally higher. Investors who need stable income are suitable to choose funds such as dividend-paying funds. Those with a conservative investment style or retired people should invest in low risk funds, such as investment grade bond funds and money market funds, in order to achieve low risk and capital preservation.
- Risk tolerance
Investors can determine their risk tolerance level based on their age, investment horizon and career. Generally speaking, youngsters with high human capital should have a larger proportion in high risk assets, such as equity funds, because young investors have longer investment horizons, having more time to recover the losses that investment may bring, and vice versa. For Investors with stable income, such as doctors and professors, the stability of their monthly salary is similar to that of the income generated from fixed incomes. Therefore, they should have a larger mix in equity funds. On contrary, investors with unstable incomes, such as entrepreneurs, their income styles are more similar to that of stocks, so they should have a larger mix in bond funds in order to balance the risk.
- Your own existing portfolio
If investors have other investment holdings besides funds, they should review the existing portfolio and choose funds that can balance the risk of the portfolio. Investors should choose low risk bond funds if their existing portfolio is based on high-risk financial products, such as options, stocks, etc., and vice versa.
At the fund level, investors should understand the funds’ performance, risk level and fund fundamentals when selecting a fund.
- Funds’ performance
To measure the performance of a fund, investors can use the same type of funds or benchmark as a comparison. Positive or negative fund returns cannot fully explain whether the fund’s performance is good or not. For example, fund A’s return rate is -3% this year, but the average return rate of the same type of funds as fund A is -10%. The comparative performance of fund A is good, though it brings a negative return. Investors should compare the performance of funds with benchmarks in order to make a reasonable evaluation.
- Fund’s risk level
Instead of picking funds by evaluating their performance, investors should consider the risk exposure of funds. The investment strategy, geographic allocation and investment sector of a fund determine its risk level.The standard deviation of a fund reflects its risk level. The investment strategy outlines the fund’s investment direction, such as its asset allocation and its characteristics, which directly affect the fund’s risk level. Moreover, the investment regions and industries are also significant factors that affect the risk exposure. Funds invest in developed markets and diversified industries encounter low risk, while funds invest in emerging markets and single industry may encounter higher risk.
- Fund’s fundamentals
Fundamentals of funds include management fees and fund managers. The fees affect the investor’s return, because they will be directly deducted from the fund price, causing the price to fall. Fund managers are responsible for formulating the investment strategy and making investment decisions, which may directly affect the performance of the fund. Therefore, investors should keep a close eye on the investment style of the fund manager and ensure that it is consistent with your own belief.
There is no set of normative or winning formulas for investment. Investors should first understand their own needs and the characteristics of investment products in order to choose products that suit them. If investors do not have much knowledge on financial products, they can hire investment advisors or portfolio managers to build a suitable portfolio for themselves.