Steps For Investing In Managed Investment Funds

Managed Investment Funds

Managed Investment Funds

Investing In Managed Investment Funds

The sheer number of investment funds that are available can make the prospect of selecting and investing money in them somewhat daunting. Rather than avoid them and miss out on opportunities to put your money to work, use the fundamentals presented here can help guide you through the process.

Know your goals

When you know exactly what is it you are trying to achieve, it becomes easier to match your goals to the appropriate investment funds.  It is important to be explicit about your goals to the extent of knowing how much you will need and the length of your time horizon. Use these questions as your guide to goal setting:

  • What exactly do I want/need to achieve from my investment funds?
  • How much would it cost me today?
  • How long do I have to achieve it?
  • How risk tolerant am I?
  • What are my other financial priorities?

Follow this process for every financial goal you need to achieve and then prioritize your goals.

Practice asset allocation

A big mistake people often make is to go blindly into investment funds without a proper strategy. A piece meal approach to investing is usually not effective. Instead, look at the universe of investments and asset types and formulate a plan that includes a suitable mix so that you can be properly diversified and balanced in your portfolio. This is one way to create stability in your long term performance and reduce risk exposure to any one type of investment funds.

Do your homework

The marketplace for investment funds is fairly large with some being pretty well established and others new to the scene.  It is important to find a way to objective evaluate and compare investment funds and fund managers on a number of factors.  Past performance, charges, fund objectives, and ratings by independent research firms can all provide indications of the investment funds suitability for you. Instead of going for the high-flying fund of today, look at a five to ten year history of performance to judge how consistent the fund is in achieving long term results. The better funds are the ones that outperformed others during down markets.

Weighing Investment funds risk versus return

Anytime you discuss risk, you have to include rewards in the same discussion. The amount of returns you expect are directly related to the amount of risk you are willing to assume.  If you are totally risk adverse, then you can’t expect to achieve returns much higher than those offered through a savings account.

It’s also important to understand the various types of risk, such as the risk of inflation or taxation risk.  If you’re money is sitting in a low yield investment, you risk losing a lot of future purchasing power to inflation or taxes.  There are ways to minimize risk, through diversification and establishing long time horizons.  When you fully understand your own risk tolerance, you will be in a better position to evaluate the risk associated with particular investment funds.

Understand the costs

With most managed funds, you can expect a host of fees to be charged. It is important to understand all of the costs as these have the potential of eroding your returns over a period of time.  Most funds charge either an entry fee or an exit fee and all charge for operating cost or fund management expenses.  The difference in one half percentage point on management fees can cost you thousands of dollars over a long period of time. Compare fees carefully.

Tax consequences

Investing in investment funds that appreciate in value will almost always generate a capital gains tax. It’s hard to avoid those especially if your fund performs well.  If you invest funds that generate income in the form of dividends, these can also result in taxes at a higher level than capital gains.  Make sure you understand your own tax situation before investing in managed funds.

Investment Funds Need good decision making

The first important decision you made was determining which investment funds to buy. The second most important decision is to determine when to sell your investment funds. Investing in investment funds should be done with a long term perspective. If you have chosen a fund well, you should be able to leave the buying and selling of the underlying securities up to the fund manager. However, there may come a time, after a period of poor fund performance, that you would consider selling the investment funds.  It would be important to do the same kind of evaluation of the fund as you did in selecting it in the first place. If other funds in a similar class are performing better, it may be time to switch.

The other time you might consider selling your investment funds is when your own investment objectives or risk tolerance have changed.  This typically happens as people get older and they need to adopt a more conservative position the closer they get to retirement. Leave your thoughts and comments about your experiences of investment funds.

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