If you have decided to invest money in an investment fund, you obviously want to place it in a “good” fund that offers an attractive return, either as an increase in the value of its shares or in the form of regular dividends.
How do you recognize a “good” investment fund?
It is a basic rule that the performance displayed by an investment fund should not be the only selection criteria, because a good performance of the past is never a guarantee of good performance in the future.
There are many beliefs and convictions, secret recipes and half-truths about how best to select an investment fund. But what about in practice?
Is a large fund better than a small one?
No: In contrast to the belief of many investors the volume of assets managed by a fund – i.e. the amount of money investors entrusted the fund – says nothing about the fund quality. All depends on the fund manager’s ability to invest this money quickly and at low cost in lucrative assets. If prices rise in a particular market over a longer period, investors tend to invest more money in funds that invest in this market. But: The higher the amounts the fund has to invest, the higher the risk that the fund manager has to acquire assets at inflated prices. This is especially true for funds that focus their investments on very specific markets and are therefore only slightly diversified.
Is a large fund company better than a small one?
No. The heavyweights of asset management often benefit from a stronger presence in the media, whether due to expensive advertising campaigns or because of their wider range of products, and are therefore more known to the general public. The quality of a fund depends more on the quality of its manager. “Small” fund providers also have very good managers who are often more specialized in niche markets than the large fund factories. In turn, the large asset managers have of course more resources to attract top global talent.
Is a new fund better than an older one?
Not necessarily. An investment fund is often launched to take advantage of a positive development in a given market. In the first months after its founding – assuming it manages to attract enough investors – it may very well achieve an impressive performance. This does not mean that the fund manager can maintain this performance over a longer period or even over several years. However, a consistent performance over several years is the most reliable indicator of the quality of a fund.
Is a high price of its shares an indicator for the quality of a fund?
Definitely not. Neither the initial issue price of the fund units or shares – regardless of whether it is 50 or 1,000 euros – nor their current price says anything about the quality of the fund manager. A comparison between the issue price and the current price of the fund shares, however, shows if the value of the fund has risen or fallen since its inception – and that in turn gives information about the talent of the fund management.
How useful is the rating of an investment fund?
Various independent international companies such as Standard & Poor’s, Morningstar or FERI Trust have specialised in analysing and rating investment funds. They closely and continuously follow the performance of the various funds and the continuity of this performance for a given level of risk. The ratings these agencies award the funds actually represent an interesting tool allowing an investor to see how funds compare to each other and to choose the one that best suits his needs.