When you save for the long term, you’ll usually do so in a fund. A fund is designed to protect your money and make it grow, but there are literally hundreds of them to choose from, each with its own performance metrics and fees. How on earth do you understand what’s going on?
The best way is to learn how to read a fund fact sheet, also called a minimum disclosure document. It looks hectic at first glance but it’s actually not too complicated. Here are some key things to look out for:
A short summary of the fund’s main goal. For example, to provide a stable return above inflation, or to invest in high-performing tech stocks.
Explains how the fund hopes to achieve its objective. You can decide if you agree with the way the managers approach investments, or whether you should rather look elsewhere.
Top 10 holdings, asset allocation and sector allocation
Most funds show their top 10 holdings – the assets or other funds where most of the money is invested. Asset allocation shows the breakdown of how the fund is structured: 70% in shares/equities, 15% in bonds and 15% in cash, for example. The sector allocation shows how much is invested in which sector, like 20% in financial stocks, 15% in technology stocks etc. These indicators should align with the fund strategy.
Factual information about the fund. This section might include the fund size (total amount of money in the fund), the unit price (most funds are broken up into units, which are sold to investors), the risk category and more.
What the fund’s performance is measured against, or what it aims to achieve. A fund might set out to mirror the JSE’s top 40 returns, for example, and there’s a good chance it might achieve that benchmark, but it also might exceed the mark or miss it altogether.
Depending on how long the fund has been active for, the fact sheet should show its performance over a number of years relative to the benchmark. This information is helpful to identify whether the fund is meeting its objective.
Highest and lowest annual returns and maximum drawdown
The highest and lowest returns give you the best and worst-performing years of the fund. The maximum drawdown gives you the maximum percentage that the fund has ever dropped in one go.
Ah, fees. This is how the fund managers make their money, and it’s also where it might feel like you’re back in maths class. You’ll see things like TER (total expense ratio), TC (transaction costs) and TIC (total investment charge) but the most important metric for you as the investor is the EAC (effective annual cost). The EAC includes all the fees you’ll pay and shows the total cost per year of investing in the fund.
Ask for help
Being able to understand a fund fact sheet allows you to shop for investments with confidence, but you might still need some guidance about which aisle to shop in! A qualified financial advisor can help you choose the right kind of fund depending on your investment goals. Set up a meeting and take control of your life.