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Unit trusts and Mutual Funds
How to Invest best in funds?
For
the small investing getting the right information is paramount,
but difficult.
There
are ways in which ordinary investors can help minimise their
chances of buying into an unsafe paper asset such as an
investment trust or
unit trust or other type of
fund.
Try asking?
1) What investments are
currently held in the fund?
This should give you a clear idea of the kind of fund the
manager is running. If you do not understand the answer, this
may not be the right fund for you.
2) Has the fund got a clear
investment strategy?
Again, what you are looking for is clarity. If the advisor
cannot explain the strategy clearly, or you cannot understand
how the investment works, then leave well alone.
3) How does the fund measure
risk and how risky is the fund?
Investors are entitled to know how risky a fund is before
putting money into it and to be reassured that the managers have
a proper measure of that risk. Also ask, does the fund manager
invest his own money in the fund? If he does not invest at least
some, then it is usually best to avoid the fund.
4) What are the full costs of
investing in the fund?
A really crucial question which may make some advisors and fund
managers wriggle. Hedge fund managers in particular can charge
performance fees of up to 20 per cent of profits.
5) Does the fund have a
published track record and if so what is it?
Another crucial question. While performance data for standard
UK-domiciled equity funds is quite easily obtainable, it is more
difficult to obtain a clear picture of how hedge funds or
offshore funds are performing.
6) How easy and quick is it to get my
money out if I want to?
This is a particularly apposite question for property finds or
hedge funds - and the answer can sometimes be: not for several
months. How much will it cost to get my money out?
7) What is the fund's system of
asset allocation?
A useful check to ensure that the fund manager has a clear sense
of direction and is not simply making it up as he or she goes
along. Also check if the fund has lots of holdings in other
funds, this is not a good sign as it may suggest that the
purpose of the fund in part is to support the price of other
funds. This may work in good times, but in bad times it is
disastrous as all funds will sink together when the market
falls. If one goes down, they all go down.
8) Who is the fund manager
regulated by?
If the answer is no one then be very wary of investing your
hard-earned cash.
9) To what extent am I protected
if the fund goes bust?
Again if the answer is not at all or hardly at all, then you
should not invest unless you are an investor who is willing to
lose everything.
10) Who supports the fund team,
such as bankers and accountants?
This apparently innocuous question can set danger signs
flashing. For example, if the accountancy firm auditing a very
large fund is a very small firm, as was the case with Madoff’s
fund, then that should set the alarm bells ringing.
If you do not have a financial advisor and you are investing
directly in a fund, do not be afraid to ask the fund manager the
very same questions.
Remember, it is your money you are investing.
So always take professional advice before you invest in
anything.
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