5 questions you must ask when choosing a fund

This course was reprinted from Morningstar, with some revisions from Futuyou

If you don't know how to choose a fund that matches your investment goals or investment style, you might want to answer the following five questions first:

How has the fund performed in the past?

How risky has the fund been in the past?

What does the fund invest in?

Who will manage the fund?

What are the fees charged by the fund?

01 How has the fund performed in the past

To truly understand the fund's performance, you must not only look at the rate of return, but also have a corresponding background reference — compare the fund's return with an appropriate benchmark. The so-called appropriate benchmark refers to relevant indices and other funds that invest in the same type of securities.

Many people think that if there are two funds with annual returns of 22% and 20% for the past two years, then the former must have performed better. Sometimes it's like this, but it's not an eternal law.

A fund with a return of 22% may be 4 to 5 percentage points behind its performance benchmark or similar funds; while a fund with a return of only 20% may surpass similar funds or performance benchmarks by 6 percentage points. Therefore, the latter is a higher-quality fund.

02 How high was the risk of the fund in the past

Investments are risky, and some funds are more risky. Generally, the higher the return on investment, the higher the risk, and the greater the possibility of loss. Therefore, when considering the return rate of the fund, it is necessary to also consider the fluctuation range of the fund.

Two funds with the same rate of return may not be equally attractive because their volatility may vary. There are many ways to measure the volatility of a fund, where standard deviation and beta coefficient are two commonly used risk calculation indicators.

03 What do funds invest in

To have reasonable expectations of a fund's return, it is necessary to understand its investment portfolio, that is, what securities the fund invests in. For example, you can't expect a bond fund to return 10% a year, but for an equity fund, this is far from whimsical. Remember, don't guess a fund's portfolio based on its name.

How do fund managers use fund assets to invest? They can simply buy stocks or bonds, or a combination of the two; they can choose stocks of large well-known companies or invest in unknown small companies; they may concentrate on investing in high-priced stocks that grow rapidly, or they may favor low-priced stocks with poor profit prospects.

As far as a specific stock is concerned, the fund manager may only buy 100 shares or own 1 million shares. By carefully studying the fund's investment portfolio, you can understand the fund manager's investment strategy. In Morningstar's fund rating system, key analysis of investment portfolios is carried out mainly through projects such as position status, industry classification, and Morningstar investment style box.

04 Who will manage the fund

Fund managers hold investment power and have a significant impact on fund performance. Therefore, when selecting a fund, it is important to know which fund manager is issuing orders and how long they will serve. Not knowing anything about it can result in unexpected losses.

For example, some funds have had impressive performance over the past few years, but once the fund manager was replaced, the investment strategy changed drastically, and the fund's performance declined rapidly. Of course, there are also funds that originally did not perform well; on the contrary, their performance flourished after they were replaced.

05 How much does it cost to buy a fund

Funds don't necessarily make money, but they do have to pay fees. To receive professional financial services, investors must pay management fees, subscription fees, redemption fees, conversion fees, etc.

But it's too expensive, and it's not a good deal. These rate levels remain largely constant from year to year, yet the return on fund investments in stocks and bonds fluctuates. You can't control the sudden changes in the market or the investment operations of fund managers, but you can control expenses.