Chapter 12: Understanding Mutual Funds – Investing made easy by Rosa Sangiorgio

Investing made easy is a bi-weekly series by Rosa Sangiorgio exclusively for Vivamost

Investing directly in equities or bonds can be rewarding if you have adequate knowledge of markets and appetite to take risks. More often than not, as investors, we lack the expertise and even the time to research and educate ourselves about the nitty-gritties of single securities’ market movements. In such cases, investing in mutual funds is a more suitable way to participate in stocks and bonds markets.  

A mutual fund is a pool of savings from many investors that is managed by a market expert who invests the money in hundreds of single financial instruments: stocks, bonds, etc. Fund managers who are in charge of running mutual fund schemes have years of experience (often decades) behind them and are supported by continuously updated research. Usually, they state their objective upfront, track their performance and provide information publicly (i.e. check www.morningstar.com).

The benefits of investing through mutual funds:

• Professional Management – Mutual funds offer you the expertise and time of fund managers, when/if you don’t have the necessary skills or time to identify the right securities.
• Diversification – with a mutual fund, you get the benefit of holding hundreds of securities (like a boxset of music albums) and the likelihood of one security disproportionately impacting your results (or not liking your music experience) becomes much lower.
• Low Ticket Size and liquidity – Investing in mutual funds lowers the barrier to entry, as some shares/bonds quote very high prices and can be inaccessible (e.g. Lindt & Sprüngli or Berkshire Hathaway). Additionally, fund managers are able to get better information on the liquidity of the investments, therefore gain better pricing, than as a private investor.
• Risk Management – A professional fund manager has objective risk management guidelines in place that are backed by strong research and implemented with a rigorous process. When investing directly you may overlook risks linked to a particular security and suffer the consequences.
• Taxation – Depending on your domicile and jurisdiction of investment, you may be taxed on direct investments differently than on funds. Often with funds being the better option, thanks to regulators’ preference towards professional management of wealth.

Once that you have decided to invest via a fund, there are many factors that you need to consider. Starting with the Fund Management Company (meaning the firm that is behind the specific fund), followed by the specific fund you’re considering buying, and finally the securities within the fund (so-called “look through”).

Read the prospectus closely. 

If possible, read the full prospectus, even if it seems boring. You will learn about the Fund Management company, about the management style of the fund managers, about fees, about risk tools in place. If you don’t have time/attention to read the full prospectus, at least read the brochure and the factsheet, or explore websites and peer reviews you can find online.

Look for an experienced, disciplined management team.

Given today’s easy access to information, try to find information on your portfolio manager. If you find yourself analyzing a mutual fund with a manager that has little track record or, even worse, a history of losses, consider buying something else.

Find a management philosophy aligned with yours.

Like all things in life, there are different philosophical approaches to managing money. There are mutual funds that specialize in “value” investing, others in “growth”. Some believe in owning only blue-chip companies with healthy dividend yields, others in more innovative small caps. Some aggressively target capital gain, others have a more conservative approach.

Additionally, your desired social and environmental impact must be addressed. Is the fund manager only targeting financial returns? Is he/she targeting and measuring the social and environmental impact that you care about? It’s important for you to find a mutual fund or family of mutual funds that share the same investment philosophy you do.

If possible, look deeper.

Knowing the strategy and processes implemented by the Fund Manager is important, but (whenever) possible try to find information about the securities held by the Fund. For obvious reasons, this is not always possible, but most funds publish the list of securities at least once a year, and the top 10 holdings on a monthly base. Looking for this information, you will discover the existing reporting of the fund, and you’ll be able to assess the level of transparency. Nobody wants to invest in a black box.

Choosing between active and passive funds.

Some funds are designed to passively follow a particular market or a specified index. These are often referred to as “index funds” or “passive funds” and basically buy all securities in the specified market. Other funds are actively managed, meaning that they actively choose which securities to buy, according to their objective.

Passive approaches may suit you if you seek exposure to the market and aren’t looking for specific securities or higher performances. Active investment strategies, by contrast, try to outperform the market, buying those securities that the fund manager feels will contribute to its strategy both in term of profitability and impact.

Pay attention to the Total Expense Ratio (“TER”).

It takes money to run a mutual fund. Renting the office, paying employees, running a website, etc. all those activities have to be taken care of before your money can even be invested! That’s why to invest in a mutual fund, you pay fees. Most funds charge annual management fees and administrative costs, some also impose initial sales charges or exit fees. In any case, before investing, check the total cost you will pay, also known as the total expense ratio. The Fund Management Company is obliged to publish this information, so keep asking until you get a good answer. Over time, these small percentages can result in a huge difference in how your wealth grows. 

If you are skilled enough to do so and can dedicate the time and research, it would be safe to conclude that you can consider investing directly in securities.  If you do not have either, it’s best to opt for the mutual fund route and make the most of professional fund management to enhance the value of your investments. Whatever route of investment you choose, keep an eye on it, take a look into composition and performance at regular intervals and assess whether your financial goals are being met as a result of your investments.

About the Author:

Rosa Sangiorgio, an Independent Advisor, is an expert at scaling investment methods that generate positive, socially responsible and environmental welfare impact in addition to a financial return. She worked for several European Financial institutions in the area of Wealth Management and Private Banking. Also, she was Head of Sustainability and Impact Investing in the Investment Management team of Credit Suisse until January 2020. Rosa is also a CEFA charterholder and TEDx speaker. 

• Equities
• Fund management
• Investing
• Investment
• Mutual Funds