Henry Ong, president of the Philippine chapter of the US-based Registered Financial Planner Institute, gives six pointers on how to choose a mutual fund:
1. Check if the fund's objectives and investment policies are compatible with your own objectives because there are different types of funds that offer varying risk levels. Some funds are more conservative that they tend to preserve capital, some are diversified in nature that provide long term capital growth and others are more aggressive with so much focus on stock market investments.
2. Consider the fund's past performance. This can be checked from the mutual fund company's website or their offering prospectus. The level of volatility, meaning the changes of the mutual fund's prices, will suggest the risk level of the investment. The higher the volatility, the riskier.
3. You also check the qualifications and experience of the people in management who are managing the fund's portfolio. The track record of management sometimes can be used to gauge the riskiness of the fund if it has no substantial historical data yet for evaluation.
4. Look at the breakdown of the fund's portfolio. The composition of the portfolio will show how diversified the fund is and whether it complies with its own investment objectives.
5. Determine the sales charges involved if you decide to sell your fund later on. Compare the charges with other similar funds.
6. Consider the services the fund provides to its shareholders. Services such as regular reporting of fund performance, or method for systematic withdrawal and other privileges can be important too.
Chartered Financial Analyst Dennis Yaw shares his thoughts:
Size and liquidity, track record, compatibility with personal financial objectives, fees and charges and good service indicate which mutual funds would be the safest bets.
"There are very few choices here (in the Philippines) and it is a very young industry, but offhand I would go with the big names — say the trust fund of a big bank, or the funds of AIG, Philam, Sunlife and Ayala Life. They would be the safest bets," Yaw said. (Editor’s note: Yaw is not connected with any of the companies he mentioned.)
Yaw says size and liquidity matter a lot, especially in these trying times. However, since the market is still very young, Yaw says a five-year track record is enough to show how the fund anticipates ups and downs. A good benchmark for equities or growth funds would be the Philippine Stock Index (the Philippine Stock Exchange website http://www.pse.org.ph is a good resource).
"You need to find out if they have been fairly consistent," Yaw says. Don't just look for spectacular returns during boom times. Funds also need to prove that they don't lose their shirts during downturns.
Investors should also do some soul-searching before choosing both the mutual fund and the kind of mutual fund they want. Find answers to questions like: What are your requirements, risk appetite, timeframe, you are in what stage of life?
"That will determine whether he should go aggressive or conservative, whether he should go for growth funds or balanced funds. This has absolutely nothing to do with the fund or fund managers," Yaw said.
In investing, there is such a thing as the life cycle. The rule of thumb is the younger a person, the more leeway to be aggressive. "A more aggressive fund can multiply your money faster but if you are a 60-something retiring lola, you can't accept that kind of risk anymore," Yaw explained.
Speaking from experience, Yaw says fees and charges should be one of the considerations of an investor, but these fees are small as a percentage over the long term. He focuses more on disclosure, on how a company provides information that allows investors to make an informed decision. Being a seasoned investor, to him information is key and to a certain extent, a prospectus is his good friend.
"It would be useless to go through all that soul searching to choose the fund that suits you only to find that the investment manager can do all that she likes with the fund," Yaw says.
Yaw says good prospectuses should be clear on the fund's objective, investment guideline, how decisions are made, show the fund's track record, the identity of the managers and their qualifications and — ideally — a breakdown of their investments.
"Agents of these funds will describe to you what they are selling. Ask them deeper questions about the type of investments their funds make and if they can answer in detail, that would really be great because you can make an informed choice," he says.
Once the choice is made, Yaw pushes for an annual checkup to make sure that your portfolio still matches your investment objective.
"People are willing to pay their doctors for their annual check-up. I think people should start paying someone to give them an annual financial checkup," Yaw says.
- From "Advice: How to choose a mutual fund" by Ma. Salve Duplito, published on http://money.inq7.net
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