During July (National Savings Month), much has been said and written about the importance of saving. As an individual investor, one of the key decisions you will have to make is choosing the right fund managers to achieve your savings’ objectives.
Prasheen Singh, director and consultant at RisCura, provides some crucial guidelines for everyday investors to keep in mind.
Look beyond the brand
Focus on what you want to achieve when you’re choosing a fund manager. It’s not only big brands that can deliver on what you need. However, if you choose a lesser known brand, make sure that the company has an established track record and is managed by reputable professionals.
Consider fees in context
Fees are an important factor when choosing a fund manager as any costs will inevitably be passed on to the end investor. The total fees should be determined on a risk/reward ratio. So, what does this mean? The lower the risk involved, the lower the fee should be. For example, a cash manager will have lower fees than an equities manager because the cash investment is inherently lower risk. When you are comparing fees, make sure you are comparing apples with apples when it comes to the level of risk involved.
Remember that fees are representative of the type of product and not the quality of the product. Higher fees are not an indicator of better quality in the investment world.
Importantly, make sure you understand the total fees of the funds you are considering. This should include adviser fees and all other related costs. Always ask whether there are any additional fees to be aware of, such as performance fees.
Diversification is one of the best ways to mitigate risk in the investment world. To diversify, you’ll need to invest in different types of asset classes such as cash, equities and bonds as well as different fund managers. How you structure this diversification will depend on your appetite for risk, which is largely dependent on your investment time frame. Generally speaking, the longer you’re planning to invest for, the more risk you can take on.
Do your own research
Given the wealth of information available today, you can do some of your own research.
Visit the fund managers’ websites and compare the fund fact sheets of the funds you’re considering. Ensure you understand the risk profile of the portfolio and the mix of asset classes. You also need to understand what is producing growth in the fund, i.e. how does the fund manager plan to achieve the return objectives of the fund? And, how consistently this has been achieved over time – not only in the last year or two. Some of this information may be too technical so you may need to speak to an independent financial advisor.
Remember that it takes time for a fund to achieve its objectives – typically between three to five years. There will be periods when the fund’s strategy is out of favour, and that’s ok. You need to consider it in a long-term context and understand how and why the strategy that is out of favour today can make a comeback in a few years’ time. Don’t make your decision based on who has won the most awards recently, as these are based on short-term performance. However, if a fund manager has consistently won awards over an extended time period, that may be worth paying attention to.
Expect clarity and understanding
Be careful of products that are opaque, where you don’t understand the strategy or how they aim to achieve their objectives. Good fund managers should be able to explain their approach and how they intend to achieve their objectives in a manner that makes sense, even to a novice investor.