Wealth Management

Simplifying fund selection for your investment portfolio

October 2019

Read Time: 3 minutes

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:

  • Is there a formula that can help you choose which funds you should invest more into?
  • How can one include investments in new themes without significantly elevating the overall risk of the portfolio?

3 variables that matter the most:

While you can employ a range of methodologies to pick funds, every investment fund has three key variables: 

  • Investment strategy: Includes the investment process, underlying asset class, factors driving return and risk
  • Fund manager: A manager’s past track record, total and relevant experience, stability of the team, decision making criteria for investments
  • Product design: Legal structure (AIF, MF, PMS, Direct), tax structure, fee and liquidity

To assess if a fund  ticks the above three boxes or not, you should ask the following questions:

  1. Is the investment strategy tried and tested or relatively new?
  2. Is the fund manager experienced in running this strategy? Is the core team of the fund stable? Have they made money for investors?
  3. Are the fund’s structure and terms common? Is this a new construct?

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:

  • Established asset class and investment strategy, with historical track record
  • Stable manager with consistent risk-adjusted performance
  • Tax efficient, low cost, liquid structure

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.

Author: George Mitra, MD & CEO, Avendus Wealth Management

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