Tips for Choosing Mutual Fund Products
As previously discussed in the article Preparation to Welcome the Bright December after ‘November Rain’, let’s discuss the tips that you could use to help you choose Mutual Fund products before you start investing!
What are the factors that need to be checked prior to choosing certain Mutual Fund products?
Individual Risk Profile
The risk level of each investment product varies, including Mutual Fund products, according to the product types. You would not want to opt for product with higher risk than your own risk tolerance. Hence, it is important to understand your risk profile so that you could choose product that is most suitable for you. After you downloaded Moduit application, you will need to complete questionnaire to determine your risk profile. The products that are suitable will vary depending on individual’s risk profile. For example, if you are someone with risk profile conservative, the mutual fund product type that is most suitable for you will be Money Market Mutual Fund where this Mutual Fund type carries the lowest risk if compared to other Mutual Fund types. Detailed explanation regarding Mutual Fund type will be discussed in the next article.
Other than risk profile, other factors that could be the consideration in choosing certain Mutual Fund product will be investment period. For example, if you would like to invest for longer term, 30 years, you could possibly choose Mutual Fund product with higher risk to take opportunity of the higher return (higher risk = higher return). Why? This is because you will have enough time to pass through the market volatility, fund movement and change your investment strategy (if needed) before you reach the end of your investment period. Unlike the circumstances where you would like to invest for a shorter term, 1 year. Under this situation, you could possibly consider choosing lower risk Mutual Fund product so you could be more certain in reaching your investment goal.
Mutual Fund Performance, such as historical performance and risk indicators such as Sharpe Ratio, standard deviation and beta
- Historical performance
You could assess Mutual Fund performance based on the consistency of the product performance historically against benchmark. However, please note that historical performance does not reflect future performance.
- Sharpe Ratio
This ratio is an indicator that is used to measure the efficiency of certain Mutual Fund product in attaining the return based on its risk level. This indicator is calculated by comparing risk against return of the Mutual Fund product. Performance of Mutual Fund product, especially Equity Mutual Fund, is better if the Sharpe Ratio is higher.
- Standard Deviation
Indicator that is used to measure how far the difference between the return of certain product compared to the average return historically. Higher standard deviation indicates higher potential risk the Mutual Fund carries.
Risk indicator that is used to measure the volatility of certain Mutual Fund product as compared to the market or its benchmark. Beta = 1 means Mutual Fund movement is in line with market movement. Beta that is less than 1 means Mutual Fund movement is more stable if compared to market movement. Beta that is greater than 1 means Mutual Fund is more volatile if compared to the market.
Other than the 3 above-mentioned factors, it is also important to understand the performance consistency of the Investment Manager who managed the Mutual Fund product. From all these factors, this one might be the hardest to obtain or the information is not publicly available. However, do not worry! Moduit has performed strict due diligence prior to adding certain Mutual Fund product to application, Moduit performed strict product due diligence. Some examples on the factors that are included in the product due diligence are Mutual Fund performance and managed funds consistency. In addition, the Mutual Fund risk is also being assessed. This due diligence is performed to ensure the products available for Moduers are reliable products. Moduit is also registered, regulated by Otoritas Jasa Keuangan (OJK) and obtained ‘Agen Penjual Efek Reksa Dana (APERD)’ license and Financial Advisory license.
So, wait no more and let’s start investing! 😊