How to choose an investment fund?
You will find primary information about the investment policy of a fund in the fund prospectus. You should definitely consider
the information about the yield expectations of the typical investor of the fund and the description of its risks.
However, the information in the prospectus is rather general and gives the fund manager relatively free hands in changing the
investment principles whenever necessary. For example, the Swedbank Eastern European Equity Fund invests mainly in small companies, but
according to the prospectus it is not prohibited for the fund to also invest solely in the shares of big companies. At the same time,
this would change the risk level and expected rate of return of the fund quite significantly. Make sure you read the cost review of the
fund as it gives you a good overview of how the fund managers make their investment decisions. The cost review contains information about
the biggest investments of the fund as well as the division of the portfolio according to countries and securities.
The analysis done by the well-known investment rating agency Morningstar shows that investors, who invest in the same fund for a long
time, usually for at least a couple of years or longer, are the most successful.
What are the risks associated with the fund?
The historical rate of return graph of a fund gives the best picture of how risky the fund is. If the price of the fund unit has
fluctuated more than the price of the units of other funds in the past, then it may be presumed that it will do the same in the future.
Conclusions about the risk level of a fund can also be made on the basis of the standard deviation that shows the average fluctuations in
the price of the fund unit in the past. For example, the standard deviation in the rate of return of the Emerging Markets Equity Fund of JP
Morgan Funds within the last five years as at 31 March 2007 was 17.25% and its rate of return in the same period of time was 26.8%. This
means that the annual rate of return of the fund was an average of 17.25% higher or lower than the annual average (28.8%) or either 8.75% or 44.05%.
Some risks are not reflected in the earlier behaviour of the fund unit. Assessment of such threats is of course extremely complicated and
there is no miracle formula here – the only remedy is sufficient dispersion of investments or investing in different regions and asset classes.
Who manages the fund?
Once you have found the fund whose risk level and investment policy are suitable, you should also check who manages the fund. Even though
several people are generally involved in the management of a fund, the success of the fund ultimately depends on the fund manager.
There are basically four fund management models:
- sole management – one person is responsible for the management and everyday activities of the fund;
- team-based management – several people manage the fund, and one of them may be the official fund manager;
- management with several managers – the asset classes of the fund have been divided between several managers, and each of them manages their own area;
- outsourced management – everyday fund management is outsourced from another asset management company.
The team-based management model gives an advantage in the situation where the fund manager leaves.
What are the costs of a fund?
Four types of costs must be considered when investing in funds: transaction costs, unit issue and redemption
fees, management fees and depositary’s charges.
Management fees and depositary's charges – payable for everyday management and administration of the fund, which are deducted
from the net asset value of the fund unit on a daily basis and not paid by the investor directly from his or her current account. Management
fees and depositary’s charges are also deducted from the net asset value of the unit when the rate of return of the fund is calculated.
Unit issue and redemption fees – these are usually paid to the agent of the fund, who advises investors and helps them choose the fund.
For example, Swedbank is the agent for Swedbank Investment Funds, JP Morgan, T. Rowe Price and Franklin Templeton funds. Issue and
redemption fees should exclude short-term speculation with funds.
You will find the rates of management fees, depositary’s charges, unit issue and redemption fees in the prospectus. The exact amounts of
fees and charges are given in the terms and conditions of the fund, which are always an inseparable part of the fund prospectus. According
to the Investment Funds Act, the terms and conditions of a fund must always give the upper limit that the fees and charges (management fees,
depositary’s charges, transaction fees payable when trading with the securities in the fund portfolio, etc.) must not exceed.