How to choose a fund, part 1


These days, it is vital that investors know what they are doing. Markets are volatile and it is possible to lose heavily in a very short space of time. Just look what happened to gold recently. No longer can you just buy a bunch of shares or stocks and hope they will grow and give a good, steady increase on capital.

As regular readers of this column know, I have been banging the drum about diversification of a portfolio for many years now and maintaining low volatility and liquidity in a fund are also very important. By having access to multi-asset, multi-managed funds you will protect yourself from placing all your eggs in one basket and thus, potentially, incurring losses due to one particular asset class retracing any previous growth.

Before I go on, please remember that I am only referring to offshore funds. Also, please ensure that before investing you are not liable to pay anything on your portfolio due to your own country’s tax laws. Finally, if you cannot afford to lose money then do not invest at all.

For those that have not invested in funds before there is a huge amount of information to digest. You need to know what they are, why they should be part of a portfolio, how to choose a fund that reflects your risk/reward ratio and the costs of having a fund.

The first thing to remember is that funds are for the long term. If you are only looking for short term growth then funds are not for you. As implied above, the price of funds and other investments will go up and down and so you might get back less than you originally put in. Time gives you longer for any downside to improve.

So, how do funds work? Basically, they pool together money from loads of different investors and they use that to buy whatever assets the fund manager is interested in. This could be stocks and shares, bonds, commodities, property, etc. Obviously, the aim of the fund is to make money for those people who have invested in it. It will try and do this either by capital growth or getting regular income via dividends and interest bearing payments.

There are different kinds of investing, when you go directly into stock and shares then you are only investing in one company or, at most, a group of companies. A fund is different. It will be managed by a manger who, hopefully, will know what he is doing. He will also have analysts and researchers looking for the best options to invest in.

Depending on the fund objective, the idea generally would be to invest in a wide spectrum of investments. Invariably, this would be more than most individuals could afford to invest in. As well as this, if someone living in Asia wanted to invest in Africa then it could be difficult for them to do the necessary research into a particular sector. By investing in a fund you circumnavigate this problem. As stated before though, some people may prefer only investing for the short term and so stocks and shares may well be the best form of investment for those particular individuals. However, funds may suit others. In an ideal world people should have both as well as other investments such as physical property and cash itself.

There are various kinds of funds to consider. There are Unit Trusts, Investment Trusts, Exchange Traded Funds (ETFs), Open Ended Investment Companies (OEICs), and Structured Products to name but a few. The most common offshore funds are unit trusts which are very similar to OEICs (the main differences are in the way they are structured legally) but the latter offers shares whereas the former issues units. In both cases, your money goes straight for the manager to invest as he sees fit. When you want to get out of whatever you are in then you just advise the fund that this is the case and the manager buys the units back from you at whatever the going rate is – there can be complications to this as some funds have exit charges or time penalties which may be prohibitive. You need to make sure you know what you are signing up for before giving the fund any money.

For most cases, there is not a limit to the amount of people who can invest in a fund unless it has reached a certain critical mass which may prevent certain strategies or hinders the fund’s actual objectives. If a fund gets to this stage then it will not accept any more money but will continue to manage what is already in the fund. If there are redemptions (people taking money out of the fund) then the manager may allow new investments but only to cover what has been taken out.

The amount of units available increases or decreases according to the how many people want to invest in the fund. The price of the units is based on the Net Asset Value (NAV) which is a valuation of all the assets in the fund minus any liabilities.

Your fund(s) will usually charge an entry fee which will be a one off cost and can be up to five percent of the investment.

Safeguards are also important. Unit trusts have trustees in place to make sure that no improprieties occur. Also, if you invest via a life company in an offshore jurisdiction then there are even more safety nets put in place for you.

To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]