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Six key steps in choosing a unit trust fund

18 June 2014 Glacier Research, Glacier by Sanlam

With over 1 000 unit trust funds available locally, selecting the right one for you can seem like a daunting exercise. Here are six steps to get you started.

1. Understand your objectives and risk-profile

A financial adviser is invaluable in helping you determine the level of risky assets you should hold. It is not only the willingness to take on risk that counts, but the ability to do so.

Considerations will include your investment time horizon – are you saving for retirement or for a new car? Do you require a high level of liquidity or an income from your investment? Your individual circumstances will help shape your investment goals and objectives.

2. Research the fund manager

A fund may have performed well in the recent past (due to strong market returns) but it’s still advisable to look at a fund manager’s track record. Who are the fund’s key personnel, and what experience and qualifications do they have? It’s also useful to note whether they’ve managed funds through both bull and bear markets.

3. Understand the fund’s objectives and the manager’s investment philosophy

A company’s website and fund fact sheets should provide an understanding of what the fund is aiming to achieve, who the key investment personnel are, and what the investment process is. From an investor’s perspective, different philosophies will resonate with different people. There’s no right or wrong philosophy, but it is important to know how the manager you choose will manage risk and protect capital when markets are falling. Is the fund managed by a team or a star manager?

4. Understand the fund categories

The Association for Savings & Investment SA (ASISA) has made risk-profiled investing easier by introducing new fund categories. Essentially this removes the tactical asset-allocation decision. If you understand your risk-profile, you can select from one of the new multi-asset categories which cater to investment appetites from conservative through to aggressive. The more aggressive the fund, the higher the level of risky assets it will hold.

If you want exposure to a specific sector, e.g. financial or retail stocks, you’ll need to look at specialist funds.

You also have the option of selecting a multi-manager or a single-manager. If you select a single-manager fund, make sure you understand the philosophy and that the objectives of the fund are in alignment with your own personal investment objectives.

Alternatively, a multi-manager fund will combine a number of different funds, giving you diversity without having to select the funds yourself.

5. Understand the costs

The fund fact sheet will show the total expense ratio (TER) of the fund. Fees can have a considerable effect on your eventual investment return, so make sure you are paying a fee that’s reasonable compared to other funds in the same category.

6. Monitor the fund

Ideally, a medium- to long-term investment should be left to grow and short-term volatility should be ignored. However, you should take note of changes that may affect your investment, such as fund manager changes or fee changes.

Also, when circumstances in your life change, always make sure that your goals, objectives, risk-profile and investment strategy are in alignment. Investors are encouraged to consult with a qualified financial intermediary to ensure peace of mind.

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