Investing Insights: How to choose Mutual Fund to be to your liking

A mutual fund is a form of investment made by multiple investors of which the money becomes a large sum to be managed by Mutual fund management companies or Asset management companies. There will be a Fund manager who responsible for managing investments for the investors according to the policy or conditions specified from the beginning of the establishment of the mutual fund within the risk framework that we have chosen and accepted.

There are many different types of mutual funds and asset management companies. So how do we choose mutual funds? We can start selecting mutual funds in the following ways.

1.      Setting investment goals and investment duration clearly. For example, if you have a goal to use this lump sum in the near future which means that you can't invest in assets that are very risky. Therefore, it may be necessary to choose to invest in money market funds or short-term fixed-income funds. In this type of fund, returns of each fund may not be very different (because it is an investment in assets that are a relatively stable and low risk). So, you can choose to invest in asset management companies that are convenient for you, for example, can do via an online channel or can be linked to a payroll bank account, etc.

But if your investment goals are about financial freedom or retirement goals, and you have a long enough investment period, such as 5 years and 10 years. It means that you can invest in more risky assets. Therefore, you should consider investing in stock mutual funds or mutual funds that invest in alternative assets. Choosing to invest in an asset management company that you feel is just convenient may not be enough. Then we need to pay attention and give time to choose a mutual fund that meets a little bit which leads to the method of selecting funds in item 2, that is

2. Considering the return of mutual funds. Regarding consideration of the comparative returns of each fund, it is advisable that we should consider the past returns as long as possible although returns in the past will not be able to guarantee future returns. But the fund has a long history of investment will allow us to see the change of rewards in each period. Especially the period of economic crisis will allow us to see the ability of the fund manager to manage the fund to overcome the economic crisis that occurred in the capital market. To put it simply, let’s see how this fund amphibious. 

Therefore, choosing to invest in mutual funds with information that is ready for making the decision and have at least 3 - 5 years of past performance should be enough to become the basis for general fund selection. In addition, when looking at the rewards, don't forget to consider the risk level of that fund as well. Because the risk and return are on each side of the same coin.

3. How much risk can we accept? Before investing in a mutual fund, you must always do a risk assessment first in order to determine what level of risk is acceptable. All types of mutual funds have specified risk levels in scales from 1 to 8 (Level 1 for the lowest investment risk and the risk level 8 is the highest investment risk). We can compare it with the scores obtained from the risk assessment form we made before choosing an investment. You will know from the score that is achieved how much risk you can accept and suitable for any type of investment.

Considering investment policy. It should be considered that each mutual fund invests the investors’ money in what kind of assets? The main assets that the mutual fund invests in are 6 types as follows:

  1. Money instruments such as bank deposits and short-term debt securities have low risk. The expected rate of return is 1.0 - 1.4% per year.

  2. Debt instruments such as government bonds and debentures have low to medium risk levels. The expected rate of return is around 3% per year.

  3. Real estate such as investing in rental properties and use the rental payment to pay as a return to investors. This has a medium risk. The expected rate of return is around 5 - 7% per year.

  4. Equity securities such as investment in shares of companies listed on the Stock Exchange of Thailand has high risk. The expected rate of return is around 8 - 10% per year.

  5. Commodities such as gold and oil have high risk. Returns fluctuate based on commodity prices.

  6. Mixed funds are investments in assets from assets 1-5 mixed according to the specified proportion. The return depends on the proportion of investment in various assets. The expected rate of return is a prediction of how much return the investment in securities will give by assessing the average rate of return in the past with its reduction due to the low-interest rate. Therefore, the rate of return from investment in money and debt instruments should not be as high as in the past. In addition, as the Thai economy grows slower, the stock market should also grow or provide lower returns per year as well.

5. Fees Charged by the Fund
is another very important factor when considering investing in mutual funds. Mutual funds with high fees will reduce the return that investors should receive. Therefore, investors must compare fund fees before making an investment decision which can be compared from mutual funds that invest in the same asset type and have similar policies in principle.

6Study information on mutual funds of interest through prospectus or Fund Fact Sheet during the information finding process to make investment decisions in that mutual fund. Important things that you cannot ignore at all is to read and study various details of mutual funds via prospectus        

The prospectus is an important information document of various mutual funds and of the management company that we must read and understand in order to get to know the investment details of that fund before deciding to invest. The prospectus has both full and a quick version which investors can request from the sale agent or download documents directly on the website of each asset management company. Important information contained in the prospectus is

  •  Investment policy framework Most of them will give you information about what funds they invest in and what percentage is the investment in each instrument? If it is an investment in shares, it will tell you the characteristics of the stock you chose to invest Including providing details of top 5-10 invested stocks as well

  • Dividend policy This says if such a fund has a dividend payment policy. If yes, how to pay? For example, what percentage of dividend payment is the profit? And how often to pay dividends. Therefore, when the asset management company can manage the mutual fund to make a profit. They need to follow the dividend payment policy announced in the prospectus.

  • All fees or expenses charged to the fund. All expenses involved in fund administration allow us to compare them with the expected return on investment in this fund. And it also can be compared with funds that invest in the same type of instruments, but different companies have different fees for how to manage the cheap fund.

  • Past performance of mutual funds is a part showing the past return of the mutual fund compared to the benchmark which will be shown in the form of returns for the past 3 months, 6 months, 1 year, 3 years and since the establishment of the fund. When compared to the benchmark, it will show us whether this fund wins or loses the market (the index is comparable to the market).

  • Risks of mutual funds will tell the fund's risk level which has scales from 1 to 8. It also describes the type of investment risk, such as interest rate risk, the risk of default payment, business risk in order for investors to understand the potential for various risks before investing.

Although investing through mutual funds will have many advantages. But investing through mutual funds is the same as other investments that investors must carefully study information before making investment decisions. If there is still insufficient information or questions about the fund's policies and risks, advice should be asked from every person offering funds before making investment decisions.


Nipapun Poonsathianrasap CFP

Independent Financial Advisor, Writer, and Lecturer.