Investment funds and ETFs have become the best ally for investors to be able to invest their portfolios in a diversified way and with the specificity that each client wants to have in their portfolio. However, there is currently a huge range on offer in this type of investment vehicle that makes it essential to analyse and compare in order to select the one that best matches what we are looking for. There are many types of investment funds. They invest in fixed income, equities, raw materials, mixed funds and even guaranteed funds. A distinction must also be made between passive vehicles, in which the objective is to replicate a reference rate; and active vehicles, where the objective is to outperform these rates. Within the active vehicles, however, there are substantial differences in terms of degrees of freedom.
5 important factors to consider when choosing the best investment fund
The art of choosing the best investment fund could be the subject of a book (in fact, there are several good ones available), but in our view the most important thing is to know the five most important factors (where to invest, how to invest, who invests, liquidity and costs). By considering these 5 factors and our needs, we can select the one that best suits our requirements.
1. Knowing how to invest and how the fund behaves
The first thing we need to know is where to invest and what the fund’s objectives are. This is a very broad question, but it should help us to filter the investment universe; from the type of asset (fixed income, equity, mixed or raw materials), to its geographical location, sector, capitalisation and investment style. The second is how to invest. Knowing the risk that the manager assumes in the management of the investment, whether it’s at an absolute level or against its reference rate; at the level of exposure or risk limits, and also how the manager has used them. Knowing how the fund behaves at different times in the market.
It is in this section that we are guided, among other things, by past returns. Precisely for this reason, the more history we have, the more raw material we can analyse.
It should never be forgotten that “past performance doesn't guarantee future returns”. However, as fund analysts, we do use this history to gain a better understanding of how to invest and how the funds behave in different scenarios. It should also help us to understand the biases of individual funds (for example, a manager with a lot of leeway who invests globally often tends to over-represent geographical regions that are closer to home).
2. Knowing the risks involved
Of equal importance to the returns is knowing what risks are assumed in advance, and here we also rely on this historical data which give us information about the maximum falls or the time to recover from them, among other aspects.
All these criteria have to be adapted to what we need. We will give more importance to one factor or another, depending on whether we are looking for the best fixed income fund or the best specialist manager in the Asian biotech sector or the best guaranteed investment fund.
3. Knowing who is making the decisions
Another important point to analyse is who does the investing, who makes the decisions. In some fund managers, decisions are made by the entity as a group; in other cases, it is individual “recommended fund” managers who manage them. It is therefore important to know how long they have been doing this work, their professional background and about the team that supports them.
4. Understanding the characteristics of liquidity
Fourthly, it is important to understand the characteristics of the liquidity of the product; whether it is a daily, weekly, quarterly or annual product, etc., and also whether there are any holding penalties or notice periods for exiting the fund in question.
5. Knowing the costs associated with the investment fund
And last but not least, understanding the associated costs in the form of implicit or explicit fees, management fees and associated expenses, as well as success fees or vehicle entry/exit charges. As in any industry, being more expensive doesn’t necessarily mean it is better, but neither do we believe that the cheapest option is the most interesting choice in most cases.
Fund selection tools
Excellent tools for searching, comparing and selecting funds can be found on the Internet. However, despite the virtues of these tools, they have two weaknesses. The first is that most of them are based only on returns, which we have already seen play an important part, but they are not the only factor of the analysis. The second is that funds are often grouped together to simplify searches, which means that many interesting details are missed.
For all these reasons, we believe that in order to find the best investment fund, one needs to rely on the help of a financial advisor, such as those we have at Vall Banc, to immerse oneself in the exciting and almost infinite world of investment funds.