There are investors for all tastes: from those who are self-managed, decide what to invest their money in and even carry out the operation themselves, to those who rely on specialized managers of a bank or entity to invest their money, decide which assets it is better to invest in and move it around according to the circumstances. Either way, what is clear is that the individual investor wants to be more and more informed about their investments, and it is a very healthy and almost mandatory exercise to be aware of the funds in which your manager has decided to invest. Building a portfolio of funds is a strategic exercise in which many factors need to be taken into account. Whether you’re going to do this directly or rely on specialists, you want to know what the basic factors are to take into account to track your investments:
The starting point is to know what your risk profile is. Between being a conservative and a risky investor, there is a wide range of greyscale that will depend on the objective of your investment, your vital moment, how much you are willing to risk, your tax profile and other elements of context. It is important to tailor the assets in which the fund or funds you choose for your money invest to your risk profile. In this way, funds investing in riskier assets, such as bonds, will be more suitable for conservative investors and, as the risk to be assumed increases in order to obtain better returns, the share of investment in equities, for example, will grow.
The effect of diversification is significant, which is why it is important to know the main categories and typology of funds that exist, since the supply today is very wide. With a focus on diversification, alternative management funds are an important part of the portfolio. Regardless of the risk of the same, we will always find funds in accordance with the investor profile that allow us not to have all the risk in the same asset or geographical area, but to have a balanced portfolio that allows us to compensate for unexpected behaviour in any asset or area. The distribution of assets, such as the weight given to equities versus bonds, is a key factor on which the return obtained will depend and must always be aligned with the investment horizon and the investor’s risk tolerance.
It’s basically about deciding what term you want to invest in. Generally speaking, when talking about funds, we usually think of a medium and long term investment so that the investment makes sense, but it is important to consider how many months or years you want to invest.
Quality of the background
Measuring the quality of a fund in which you are going to invest your money is a good practice and for this you will have to dive into the pages that make this information available to the investor. We must also take care of the type of funds we choose, especially in cases where there is a type of distribution and distribution, whether or not we want to receive periodic income.
There are various platforms that compare mutual funds by performance and by category; one of the best known is Morningstar, which bases its hierarchy on’stars’ and thus gives 5 stars to the top 10%, 4 stars to the next 22.5%, 3 to the next 35%, 2 to the next 22.5% and one to the worst performing 10%. Others analyse the performance achieved or compare fund managers, giving each one a rating. Other key figures that can be taken into account are the volatility, sharpe ratio, alpha or beta of the fund.
Knowing the professionals who manage the fund or funds you are going to invest in is important, as they will make the investment decisions about your money. If you take the trouble to find out more about the manager of your fund, you will know what his management style is and how his investment preferences are evolving. If they are also the so-called’author’s funds’ with even greater reason, as they are usually headed by’star managers’ who, if at any given time, leave the fund, they can lead to a change in the management of the fund and even the departure of a large number of participants.
Taxation and commissions
It is important to know the taxation of the different products in which you can invest your money and how the returns, positive or negative, you get from your investment can influence your accountability to the Treasury. Some products may be more convenient than others, so it is necessary to take this into account, as well as the commissions that entities may charge on each of the products.
We currently live in an environment of low volatility across all assets. If we simulate the portfolio to see how it can work, we need to look at other risk ratios such as the historical maximum fall in the portfolio.