Fund Investing

Questions to ask before buying.

What is the purpose of the fund?

Ensure that the fund’s objective matches your investment objectives
Does the fund generate regular income? Is it appropriate for the duration for which you plan to invest ? Is it adapted to your personal objectives? Does it integrate well with your other investments?

What is the risk level of the fund?

With a mutual fund you may realize gains or losses. Does the risk level of the fund match your risk tolerance? Do you find it difficult to accept price variations? If the yield varies significantly from year to year, it could be considered a high-risk fund because its return can increase or decrease rapidly.

Find out about the level of risk of the fund and determine if it is within your risk tolerance. Usually, the higher the potential return, the greater the risk.

How did the fund perform?

You cannot predict a fund’s future performance based on its past performance. However, a fund’s past performance may help you compare it to other funds with similar investment objectives. Don’t just look at the fund’s performance for the previous year. To what extent has the fund’s past performance been consistent over the long term? How did it perform in various market situations? If the fund’s investment objectives have changed in recent years, it will be even more difficult for you to rely on its past performance to predict its future performance.

What are the costs of the fund?

All fees and costs of a fund must be presented in a document entitled as well as in a prospectus simplified. Consider all costs. For example, a fund with a management expense ratio is low could impose very high acquisition costs, and vice versa. Make sure you understand what you will pay when you buy or sell units of the fund. Also consider what you get for your money. What level of service and advice will you get?

Compare the costs and returns of the fund with those of similar funds to determine what you get for your money.

Who manages the fund?

The success of a mutual fund depends on the ability of the portfolio manager to choose investments, as well as its ability to determine the right time to buy and sell them. What type of training and experience does the portfolio manager have? Does it manage other funds? What was the success rate of these other funds? What is the portfolio manager’s investment style? Find out how stable the management of the fund has been over the years. A high turnover rate could be a bad sign.

Do some research

Get as much information as you can about a mutual fund before you buy. Start by reading the disclosure documents that the mutual fund company is required by law to file with securities regulators. You can find these documents on the mutual fund company’s website or on the System for Electronic Document Analysis and Retrieval (SEDAR). You can also obtain them from your advisor.

The disclosure documents include the following:

Fund Facts – This is a plain language summary of key information about the fund, such as performance, risk and costs. As of May 30, 2016, mutual fund companies must provide investors with a copy of the Fund Facts before they decide to purchase a traditional mutual fund.

Simplified Prospectus – This is a set of detailed information on matters such as investment objectives and strategies, fees and costs, risks, tax consequences and distributions. Investors can obtain the simplified prospectus upon request from the mutual fund company.

Fund Performance Management Reports – These reports show the fund’s performance for various periods and present the factors that have affected the fund’s performance over the past year.

What type of investment funds to choose?

My investment strategy

Before choosing an investment fund to invest in, I must determine an investment strategy. What level of risk am I willing to accept? Will I prefer short or medium-term investments? I also have to think about the rate of return I want to get for my money. Each of the three main categories of funds is intended for a particular investor:

the money market fund, made up of short-term bonds, is suitable if I am looking for an investment without too much risk and allowing me to recover my money quickly enough. These products present few risks and offer regular income. On the other hand, the fund’s return is low, close to bank savings plans (PEL, Livret A passbook savings accounts, etc.),

the bond fund is composed of long-term bonds (at least 3 years). More profitable than money market funds, it is also more risky: a company may not meet its repayment deadlines and thus default to its creditors,

The equity fund is the most risky of the three main types of funds. There is no guarantee of the performance of the securities held in the portfolio. However, the return is proportional to the risk. It is also the most appropriate fund for me if I want to invest for the long term.

The other criteria

I have to take other criteria into account when choosing the fund in which I will invest:

Quartile ranking: funds in each category are divided into four groups of equal size, based on their performance. For example, a group of 100 investment funds is divided into four quartiles of 25 funds each. The first quartile includes the funds with the best returns, the second quartile includes the less profitable funds, and so on,
fees: the fees inherent in a fund are used to remunerate its managers. When I invest for the first time, I am charged an entrance fee of between 2 and 5% of my capital. Management fees are then charged each year (between 1 and 3%). A performance fee may also be charged if the fund’s performance exceeds expectations,
management style: it all depends on the performance I expect. The objective of an actively managed fund is to obtain the best possible performance, with the risks that this entails. A passively managed fund, on the other hand, only monitors the performance of a given index or sector such as the CAC40,

Volatility: expressed as a percentage, it measures the risk of an investment fund. The higher it is, the more irregular the yield. Conversely, low volatility indicates a fund that is growing steadily.