How To Select The Right Funds To Invest Your Money In

Let's talk about how you can select the right investment fund to invest in and avoid the bad ones.

The process of selecting the right funds focuses on a process of elimination.

There are three factors that I look out for when analyzing, comparing and selecting the handful of funds to invest in among the thousands of other selections in the market.

First Filter

The first filter that we have pertains to the degree of alignment that the fund has with our overarching investment strategy. To determine the alignment, we will have to examine the relevancy of the fund based on its underlying investment exposure as well as the fund manager’s investment style.

Naturally, the fund that would make the cut from the first filter are funds that provide the underlying exposure that is in alignment with our investment strategy and whose fund manager invests in a way that is similar to how we would do it if we were investing ourselves.

Second Filter

The second filter that we have pertains to the operating history of the funds.

The purpose of filtering the funds via their operating history is to examine their track record and identify the “best” fund within each category or investment mandate that they represent. Personally, if a fund does not have more than 10 years of operating history, it is immediately removed from the considerable universe.

The reason for having such a strict criterion is that 10 years is usually the minimum time frame that is necessary to discern if the past performance of the fund is an attribution of the skill of the fund manager or just dumb luck.

Third Filter

That brings me to the last filter which is past performances. With regards to the past performances of a fund, what we are examining is the behaviour of the historical returns as compared to an indexed benchmark.

What we are looking out for in a fund is the presence of minor outperformance that accumulates and compounds over time without deviating too much from the overall behaviour of the sectorial average or indexed benchmark

An example of good fund performance:

An example of bad fund performance:

If you are unable to find a fund that can consistently perform better than the benchmark, then it would be better for you to just invest in an indexed fund that provides the underlying exposure that is aligned with your overarching investment strategy.

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