Fund selection proves to be more complex than initially envisaged. Mostly for the following three reasons:
The most common fund categories are: actively managed funds, passively managed funds and ETFs. Each comes with its own pros and cons.
Actively managed funds
Actively managed funds are more expensive with the expectation that they will produce risk-adjusted returns higher than their passive alter-egos’ or benchmarks’ (a market index within which fund managers can pick stocks). If funds fail to do better than their benchmarks, however (in part, often times due to their high fees) then investors will see a delayed return on their principal. Remember, no one can control the market.
On the other hand, actively managed funds may react more promptly during market downfalls. It is also important to understand the kind of index they seek to outperform. The nature of the index they use as a benchmark have a direct repercussion on how fund managers express their convictions. Equally weighted indices constrain fund managers’ stocking-picking less and do not fall prey to bubbles. However, they may exhibit smaller cap biases and induce higher turnovers. Market-cap weighted indices being biased towards the most expensive stocks force managers to own more of those expensive stocks thus limiting their “risk budget” to express stock picking preferences.
The take-away is that investors need to verify how consistently a fund manager is able to deliver the promised risk-return profile throughout market cycles, instead of just looking at past performances. This is what the performance consistency criterion captures.
Passively managed funds
Passively managed funds tend to be a good way to get a long-term exposure to markets. They replicate the performance of an index they are meant to track.
ETFs can be categorized as passive replica of indices. As such, these may pose the same challenges as passively managed funds. They also may expose you to risks whose returns are not necessarily passed to investors.
Understanding the information above confirms that there is not one singular perfect fund category to use when constructing an investment portfolio.
For this reason, we at S:YB enable you to curate funds using the following criteria:
Feel free to peruse our knowledge centre to know more about funds.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments.
This website aims to provide information to help you make your own informed decisions.