Opinion – Marcia Dessen: How to choose an investment fund

Investing is not an easy or simple task. Searching, evaluating, negotiating, deciding, all this is a big challenge. An alternative? Adhering to an investment fund with certain characteristics, assigning the manager the task of making decisions at his (the investor’s) risk.

However, choosing a fund is also complex and requires work. In January, the industry had no more and no less than 26,705 funds. A total net worth of nearly BRL 7 trillion across more than 30 million accounts.

The numbers are frightening (amount of funds) and impressive (industry size). How can an investor, no matter how experienced, be able to deal with the huge amount of information involved in selecting 3 or 5 suitable funds for him?

It seems complicated, and it is, but when we scrutinized the information, we came to the conclusion that they are derived from the same theme and that it all boils down to ten classes of funds, according to Anbima’s classification. Traditional funds: fixed income, stocks, multimarket, foreign exchange, pension and ETF; structured funds: FIDC, FIP, FII; and offshore funds.

Funds are classified according to their objective (where they want to go) and investment policy (how they intend to achieve the objective), which identify the strategies and the main risk factors to which they are subject. The type of management —active or passive, and whether it invests in assets abroad— must also be transparently informed so that the investor knows if the fund matches their personal investment objective.

It complicates things a bit because each background class breaks down into types. Only the fixed income class, for example, has 16 types. Equity and hedge funds have 12 and 11 types, respectively. There are 23 types of pension funds!

If you invest or are thinking about investing in a fund, you should carefully read and analyze a mandatory document, called DIE (Documento de Informação Essenciales), also known as a blade. Everything you need to know, before joining, is there.

By the way, get to know and evaluate a lot of information before deciding if the fund is right for your risk tolerance level and your investment objective.

For risk management: know the fund’s investment policy and the risks to which it will be exposed: credit risk (default), market risk (price fluctuation), exchange rate risk (more fluctuation), leverage risk ( potentialized gains and losses), risk of investments abroad (diversifies, but also increases risks).

Check the degree of risk assigned to the fund and the level of volatility, the best and worst period. The investment term, in years, suggested to achieve the expected result. Yes, expected, funds do not (and cannot guarantee) profitability.

In fixed income funds, for example, it is important to check the duration of the fund’s assets. The longer the duration (average life of assets), the greater the fluctuation in asset prices.

For liquidity management: check the conversion criteria for shares at redemption. Some funds convert quotas within 30, 60, 90 days (or more) from the redemption request. The money remains exposed to risk while waiting for the ransom to be paid.

For cost management: know the administration fee and performance fee. The industry is democratic and inclusive, for small and large investors. However, it favors large investors with lower fees.

The administration fee is paid for the provision of fund administration and management services; expressed in % per year, it is levied on the adjusted equity (yes, on equity, not on profitability), being discounted from the share value. Thus, the quota is net of the fee, but gross of the Income Tax.

The performance fee is charged when the fund meets the target and exceeds its benchmark.

Finally, check the fund’s past performance. Do not do this to create expectations regarding future profitability, it would be a big mistake. The historical performance demonstrates whether the fund has fulfilled its objective, how it behaved in periods of crisis in relation to the market and funds of the same class.

Avoid investing in new funds with no performance history. Never make a decision based on past profitability, particularly short-term profitability, obtained in the last month, insufficient sampling for evaluation. Give preference to older, consolidated funds, reducing the chance of a wrong choice.

Remember, there is no such thing as the best fund, there is the most suitable fund for each of us, respecting the moment of life, investment objective, risk tolerance level and liquidity need.