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Fund selection is the second most important parameter, after asset allocation, when it comes to building a robust investment portfolio. It is a game of prudence, involving careful cherry picking of managers to help you achieve your financial goals, while minimizing risk.
We often get asked:
3 variables that matter the most:
While you can employ a range of methodologies to pick funds, every investment fund has three key variables:
To assess if a fund ticks the above three boxes or not, you should ask the following questions:
Risk increases if any of the above three variables are new or untested for a fund. In case of any new/untested fund variable, investors could experiment initially with small allocations, and dial up / dial down if the fund delivers / fails to deliver over time. One must bear in mind, however, that the suitability of a fund in any portfolio will depend on the particular investor’s risk profile.
General thumb rules:
Maximum money should be allocated to funds that score well on these three variables:
Second level of allocation should be to an established asset class with historical track record, emerging manager with superior but limited track record, and tax efficient, low-cost, liquid structure
Third level of allocation should be to an emerging asset class, emerging manager with superior but limited track record, and investor-aligned structure
No allocation should be made to poorly designed products
The key here is the ability to identify whether or not a fund ticks the three boxes, and if it does, to what extent. Once that is done, one needs to evaluate if the fund makes a good fit for your portfolio, which is a function of your financial goals and risk profile. This is where robust manager selection frameworks and investment advisory expertise can add significant value, setting you up for serious wins over time.
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