In selecting any investment, there are some very basic premises that need to be researched before actually going into investing. The fund should be analysed for :
- How easy it is to understand
- Its consistency
- Its definability
- Its soundness
First and foremost, the investment process should be simple to understand. As simple as seems it sounds, it is an important starting point.
It might take a little work, but tracing the investment process back in time will determine whether the fund’s manager is reliable with his or her strategy. For instance, making major changes in beliefs as the tastes of investors change may indicate a manager who chases trends. The misunderstanding can be magnified by the dizzying array of mutual fund names like “Select Intermediate Growth Opportunities Fund” or the “International Direct Select Diversified Balance Fund”. At the same time as the mutual fund manager who bends his or her sails to the wind trying to cash in on the latest trend may be successful over small periods, it requires outstanding foresight and a bit of luck to call the tops and bottoms of those trends.
It is also important to confirm that the strategy is definable. For an instance, can you hook the manager and the fund to the specific role you have hired them to do? If not, you may be investing in a fund whose manager exercises more independence than you would like to see. Lastly, does the fund have a resonance strategy? Read the strategy thoroughly and evaluate the resonance of its goals. If the strategy is based on theory alone and is relatively new, it is essential to make sure it’s right for you.
Even though there is widespread information available to evaluate mutual funds and their managers from multiple aspects, it is human nature to pick the fund that performed the most excellent in most recent time period. This is unlucky, as this month’s best performing funds can effortlessly be the worst performing funds next month. Then human nature kicks in again and the impulse reaction is to sell the fund. This leads investors to a predictable fence in of buying high and selling low.
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