How to Pick Funds – tips to pick your portfolio
When presented with a selection of treats like chocolates, how do you decide what flavour to go for? Similarly, the financial markets are full of a myriad of options to select from. People invest for all sorts of reasons and selecting funds to invest in can be influenced by many factors such as passion, goals, because it sounds nice, country growth rate, currency FX
fluctuations, tax options, pension, etc. For instance, news about Brexit may influence your decision to either invest in the UK or the EU. Other factors include season of the year, tendency of natural disasters like tsunami, cyclones, flooding, erosion, earthquakes, etc.
Investment decision is a personal choice that can vary from person to person. This website provides general information about investing and saving only, not personal financial advice. If you are unsure of what is suitable for you, speak to an authorised financial adviser. You should also review your investments regularly to ensure that they continue to meet your risk profile and investment goals.
Whatever your reason for investing, it is important to remember that past performance of investment funds is not a guide to future performance. The value of investments and potential gains can fall or rise at any time due to market sentiments, changes in currency FX rates, political changes, climatic conditions, etc. Therefore, investors could get back less than the amount invested.
Also note that tax rules affect individuals based on personal circumstances and any changes in tax rules could affect investors differently.
Guide to Portfolio Diversification
For your investment strategy to be effective it is important to spread your risk by diversifying your portfolio. To achieve this you must do your due diligence before investing. This should include technical and fundamental analysis as well as consideration for wider qualitative factors beyond the asset being analysed, in addition to setting clear investment objectives and understanding your tolerance for risk. You can diversify your portfolio of investment funds by spreading your money across different funds with international exposure, focus on local industries, averaging your money into different funds that invest in regional risk assets, etc.
Your investment strategy should help you realise your goals. Simply put, diversification means never put all your eggs in the same basket. Put them in different types of baskets instead. It may cost you a bit more to buy more baskets, but you'll be more at peace knowing that your portfolio is safer than having everything in one basket. Investment diversification ensures you spread your risk exposure based on your goals, tolerance for volatility, time horizon, etc. Diversification may improve your opportunity to enjoy higher returns for your level of risk. Therefore, to build a diversified portfolio, buy different types of investments (stocks, bonds, cash, etc) with returns that do not historically tend to move to the same extent in the same direction. Also diversify each type of investment, perhaps based on location, sector, class, etc. This will ensure that all the assets in your investment portfolio will not rise and fall at the same time. This way if some of your investments are falling, others will more likely rise or remain the same. Past performance is not a measure of future performance. Consequently it is important to continually review your mix of investments to ensure that your risk level remains consistent with your strategy to achieve your goals.
Factors that may affect your investment strategy include investment goal, investment time horizon, personal circumstance, behaviour, risk tolerance, natural inclination, ethical screening, tax, financial position etc. It is therefore crucial to have appropriate investment strategy as this will help you determine your investment profile.
What is your Investment Objective?
To help you determine your investment risk profile, you will need to set your investment goals and risk tolerance. To do that you must answer some specific questions.
- What are you investing for? – Short term income goal like saving to buy a house, pay for your children’s education or just for a rainy day. It could also be for long-term appreciation (capital gain) for a pension retirement plan.
- Can you tolerate a portfolio that may have high volatility with potentially higher returns or do you prefer a conservative strategy?
- What is your priority? – Avoid loss, slow and steady growth, willing to lose some to gain more later, focused on growth only, risk losses now for higher potential returns later.
- What is your investment time horizon? – Do you need your funds to be liquid (able to cash out anytime) in the near future or are you happy to lock it away for years in anticipation of higher value?
- What are you happy to pay the portfolio manager to actively manage your money – 1%, 3% or 5% of amount invested?
Beyond these questions you will need to analyse available fund managers, look at each fund's performance history, management team, and expense ratio (ratio of total cost of running the fund to its total asset value), rating, investment strategy, etc. Fund Managers do detailed research on assets (stocks, shares, bonds, funds, etc.) and analyse industry sectors, macroeconomic and political trends, company fundamentals and many other factors when making investment decisions. The ability to do these analyses costs money. Actively managed funds seek to outperform a designated benchmark like the FTSE 100 index, hence their fees can be higher. For similar reasons, expense ratios can vary widely too, for different funds.
What’s the best time to start investing?
You may be struggling to decide when’s best to start investing. The short answer is
#InvestNow. Now is the best time to invest. Generally, money invested consistently over time returns greater reward because of better average prices over time. But there’s a more important question to consider and that is – what should I invest in?
What you invest in depends on your risk profile explained above. The most important factor is time. Your time horizon is a key factor in determining what you should invest in. For instance, if you are near retirement, it would be risky to venture into risky investment because you may not have enough time left to recover if things go wrong. Therefore, you may want to be defensive / cautious and invest in conservative and less risky funds like income/balanced funds. These funds focus on low risk investments, capital preservation, generate a stable and predictable yield, and pay regular income over time into your nominated bank account for you to enjoy in the immediate term.
However, if you are young and just starting out, you may want to focus on accumulation and growth funds that focus on more adventurous investment strategy designed to generate capital appreciation over the medium to long- term. Profits are automatically reinvested to buy more units of your chosen type of investment, to continue to grow the value of your investment portfolio. Your investment choice also depends on your investment goal as explained above.
Experts’ Favourite Funds
Deciding what specific funds to add to your investment portfolio can be likened to going to get your weekly grocery from the supermarket. Let’s say you want to buy orange juice for breakfast. You go to any of several supermarkets and you are typically presented with a plethora of options to choose from. All with scintillating glossy images of succulent looking oranges split open with nectar running down. You are also often presented with supermarket brands of different types, international brands, organic, all natural and no preservatives, fresh, partially fresh, partially preserved, you name it. If you’re not careful, you could end up buying lemon juice thinking its 100% orange juice. You soon feel the bite of the sour taste when you attempt to drink it like your normal orange juice. But alas, you are shocked to reality because it is not the typical sweet orange taste you expected. How can you prevent this?
Deciding which fund to select is far more complicated than buying orange juice for breakfast. But the decision process is somehow similar. You go for what you’ve always known from family and friends, you go for what you’ve had before and liked, you ask around, or you got for what you’ve seen people enjoying – perhaps on TV. These are various filters you can use to whittle the plethora of options down to the one you end up buying.
The open market is full of thousands of investment funds to choose from. You can do your due diligence and research the various funds, you could also consult an adviser. Or rather than jumping from one supermarket to the other, you could just focus on one. That supermarket of choice can be likened to a bucket of funds pre-selected by an expert fund manager. These can contain a mix of 20, 30, 50, 100, etc. funds to choose from.
From your investment profile above, you should already know what you would like to invest in. Investment funds are normally named according to the kinds of assets they invest in and the specific goals they are designed to achieve. They also often tend to be branded so they will normally bear the name of the fund manager or sponsor with a few other distinguishing features like location, investment grade, etc. For instance, you could see
- HetoGrow EMEA Treasury High Yield income fund – HetoGrow is the brand name or fund sponsor / manager, EMEA is the location the fund invests in, treasury high yield is the asset type it invests in, and the fact that it has income fund in the name tells you it is a low risk fund that pays regular income.
- HetoGrow APAC Growth Fund – this would be a growth fund that specialises in investments in the Asia Pacific region. Note that this regional fund will likely be more risk diversified compared to a fund that invests only in just one country within that region.
- HetoGrow Global Equity Fund | accumulation – the name indicates that this fund would specialise in equity investments anywhere in the world. By nature, equity tends to be risky and stock market prices can be volatile. However, the risk is spread by investing in different markets all over the world’s leading capital markets.
- HetoGrow Africa Speciality fund | Accumulation USD – the name indicates that this is a US Dollar denominated fund that invests in specialty assets / projects in Africa with a long term view, as indicated by the accumulation appendage of the name.
- HetoGrow UK Mid 250 Income Fund – indicates that this fund invests in the FTSE 250 (footsie 250) listed companies on the London Stock Exchange. This is the second category after the top 100 companies listed on the stock exchange. This category if often referred to as mid-caps by analysts. The index can be highly volatile due to geo-political and other external factors. Expectedly, it tanked following the Brexit referendum.
- HetoGrow FT100 Fund | GBP Acc – this would focus on FTSE 100, a collection of the biggest 100 companies listed on the UK stock exchange. These companies are often called “blue-chip” and they can be more resilient to market volatility compared to FTSE 250. The name also indicates that this is a GBP denominated accumulation fund so it has a long term investment horizon.
Whatever the fund you select, you should be able to get more specific information from the fund summary or full information pack. And having selected your funds based on your investment profile, you further have to instruct your fund manager how much of your money to invest in each fund.
#InvestNow
Risk Warning
The information contained in this page is for information only and may change at any time to reflect market sentiment. It does not qualify as investment advice.
Past performance is not a guide to current or future performance. The value of investments can fall as well as rise and you may get back less than your capital investment. HetoGrow Capital Limited does not provide personal investment advice. If you are unsure of any investment or suitability for your personal circumstance, contact an authorised financial adviser.