Choice of mutual funds for diversified long-term investments

Forming an investment portfolio

As promised, this article will discuss on the disadvantages and criteria for selecting mutual funds. So, to approach the choice of mutual funds it is necessary to study their negative sides.


Profit is only guaranteed by banks

The most significant disadvantage for investors is absence of any guarantees from the management companies on the issue of profitability. As a rule, MCs' websites should carry a warning that past returns do not guarantee the future returns of mutual funds. But if you remember that only banks or "pyramid schemes" guarantee returns, you will realize that the lack of guarantees is not such a big disadvantage.

The next disadvantage is that Most mutual funds are losing to the market. Despite the fact that mutual funds are the most optimal investment tool, you need to be very careful in choosing them. We will talk about the criteria for choosing mutual funds later.

Another disadvantage is that costs. As discussed in last articlecosts are an advantage of mutual funds in comparison with other instruments. The fact is that the spread in costs of mutual funds is very large, and it is necessary to choose funds with the smallest such indicator, but not to the detriment of the other parameters of the funds. After all, the 2%-3% difference in costs will become a significant difference in profits in a couple of decades.

Payment of income tax when selling units is another significant disadvantage of mutual funds. But there is a "loophole" here. If you want to sell your stock fund units, due to the impending crisis, and buy bond fund units, then instead of selling and buying within the same management company it is better to make an exchange transaction, so you avoid paying income tax.

The next disadvantage of mutual funds is related to their correlation with the stock market. When almost all stocks are falling, mutual funds will also show negative returns. Related to this, at short intervals any mutual funds can show negative dynamics. But this disadvantage should not affect us, because we are going to invest for the long term, and the stock market almost always adds up, unless the MC has invested in frankly unsuccessful securities.

There are several other rather exotic disadvantages, but we will not consider them, as they are essentially hypothetical.

Criteria for choosing mutual funds

Now it's worth considering selection criteria for mutual funds and tell you what you should pay attention to in the first place.

Note that choice Mutual Funds - is a rather subjective opinion, which is why there are so many different ratings. First of all, when choosing mutual funds be sure to pay attention to their existence period. It is desirable to discard immediately the funds that have existed for less than 3-5 years.

Fund performance Evaluate on a time horizon of 2 to 5 years. Don't even look at six-month returns, much less one-month returns.

Amount of net assets of the fund indicates how many shareholders "invested" in this fund, which indirectly indicates confidence in it.

As mentioned before, pay attention to costs. Sometimes they can be quite high.

Also pay attention to return/risk ratios. An increase in the coefficient indicates an increase in profitability and/or a decrease in risk.

Don't forget to look at the Sharpe ratio. I think it is worth mentioning that interval funds have more growth potential than open-end funds.

The graphical way of choosing a mutual fund

Now let's move on to Mutual fund chart analysis. I will share with you my methodology for selecting mutual funds, with the help of which, if you get used to it, you can determine in a matter of seconds whether it is worth considering a fund in more detail or not.

First, open the MICEX or RTS chart over about a five-year period. Look for sharp drops and ups in the chart associated with crises and global stock market corrections. After that, you open share price chart of the fund of interest over the same period, and look at the relative decline or growth over the allotted time periods.

Let me explain: look at Figures 1 and 2 - post-crisis growth in the stock market has not reached pre-crisis levels. And the value of units in Figure 2 has risen much higher than the pre-crisis mark. Consequently, these units grew much faster than the entire stock market. And since mutual funds are subject to strong correlation with the stock market, it remains for us to select those funds that fall more slowly in crises and grow much faster than the stock market. Hence, the proposed option suits us.

Fig. 1. MICEX index chart.
Fig. 1. MICEX index chart.
Fig. 2. Graph of the cost of units.
Fig. 2. Graph of the cost of units.

In the following articles let's talk about the reasons for including other investment instruments in our diversified portfolio.

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