Too often financial advisers jump straight into portfolio construction and risk profiling without explaining the fundamental investment principles. I am guilty of this myself. Therefore I have decided to write this article to explain the basics of investing in an Investment Fund.

What is an Investment Fund?

An investment fund is a way of investing money alongside other investors to benefit from the inherent advantages of working as part of a group.

For Example:

Bill wants to buy a property because he believes that SA’s property market is about to “Boom”. He only has R 500pm. Bill can invest this money in a SA Property Fund along with hundreds of other investors. Using all the money from these investors, the managers of the Property Fund will invest by buying physical property.

How are funds managed?

Investment Funds have different mandates. These mandates explain the goals of the funds and how the fund managers plan to achieve these goals.

Examples of fund objectives:

• Allan Gray Balanced Fund:
  • “The Fund aims to create long-term wealth for investors within the constraints governing retirement funds. It aims to outperform the average return of similar funds without assuming any more risk.”
• Glacier AI Flexible Fund of Funds
  • “The primary investment objective of the Glacier AI Flexible Fund of Funds is to provide superior capital growth over the medium to long-term within a flexible mandate, utilising Artificial Intelligence (AI). The Fund aims to achieve a return of at least 5% above CPI measured over rolling 3-year periods. The Fund aims to limit downside risk over the medium to long-term, but investors must be aware that there might be volatility in the short term.”
• Momentum Factor 7 Fund of Funds:
  • “The Momentum Focus 7 Fund of Funds is a specialist portfolio with the objective to secure a consistent real total return after deduction of fees above inflation plus 6% a year over periods longer than 7 rolling years.”
• Sygnia Life Berkshire Hathaway Fund:
  • “The Sygnia Life Berkshire Hathaway Fund is an innovative and low-cost fund that gives South Africans access to a global investment powerhouse. The Sygnia Life Berkshire Hathaway Fund is a high-risk fund that invests in “A” and “B” class Berkshire Hathaway shares. As Berkshire Hathaway invests predominantly in US companies, the fund is benchmarked against the S&P500 index.”

Types of Fund Managers:

Active Fund Managers

Investment funds can be managed actively by a team of specialists. They make decisions on aspects like which Stocks to buy, asset allocation (equity/bonds/cash) and fund risk management. These are known as Actively Managed Funds.  They aim to outperform their “benchmarks” (targets) by relying on their knowledge and experience. 

Passive Fund Manages

Some funds involve little decision making. They track market indexes or market segments and are known as Passively Managed Funds. For instance, Fund Managers do not decide which securities (Stocks/Bonds/Cash) the fund takes on. This makes passive funds cheaper to invest in than active funds.

Benefits of investing in an Investment Fund:

Most people invest in funds for the following reasons:

• Advanced portfolio management.

Investors have confidence that their money is managed by competent individuals.

• Convenient and fair pricing.

The cost of investing in a fund is straight forward. You get what you pay for. Other investments like Real Estate and Share Portfolios, often included additional costs that harm your return on investment.

• Low barrier to entry.

Investors can start investing with as little as R 500pm. This is significantly less than, for example, buying a house.

• Risk reduction at a low cost.

Investment Funds can be invested in a wide range of stocks and other securities. This is due to their size. To achieve this level of diversification in your personal investments is very expensive.

How do you choose the right fund?

Before advising a client, I always spend enough time getting to know them. To recommend appropriate funds, it is important to understand clients’ goals and attitudes toward investments. Will they bet all their money on red at a roulette game, or would they rather bury it in their backyard to ensure it is safe?

I determine a risk profile, based on the investor’s attitude, financial status and goals. Funds also have a risk profile which refers to the fund’s volatility (change in performance over the short term). To ensure happy clients, I align the risk profile of the investor to the risk profile of their entire portfolio (all the funds they are invested in).

The reality is that there are 2000+ funds available in South Africa alone. An independent financial adviser specializes in matching clients with the right solutions. We are required to adhere to Continuous Professional Development. This ensures that we are informed and highly competent to provide you with the best advice.

Let’s find the right match for you.

Contact Us to start/review your investment portfolio.