Deciding which investment fund to choose is no simple task, and one of the biggest hurdles lies in the overwhelming number of available options. According to the Investment Company Institute (ICI), there are close to 140,000 investment fund products that you can invest in across all markets worldwide in recent decades, including mutual funds from Singapore, S&P 500 index funds, and more.[1]
Among thousands of investment funds, how to evaluate and choose them for long-term profit in the fund house? Let’s find out!
(Image source: https://unsplash.com)
Criteria for evaluating an investment fund
1.Analyze performance metrics
One of the most important aspects to consider when evaluating an investment fund is its historical performance, typically measured in terms of returns. While past returns do not guarantee future success, they provide valuable insights into the fund’s consistency, risk management, and ability to meet its stated objectives over time.
Reviewing an investment fund’s returns over different time periods (1, 3, 5 years, and since inception) and comparing its performance to a relevant benchmark may help provide a broader perspective on its performance.
2.Quantify investment risks
Most investors know their overall risk tolerance, but only the seasoned ones would also be able to evaluate the specific risk and volatility of their current and future investments.
To enhance your investing skills, it's essential to learn how to evaluate an investment fund's risk/reward profile using these five statistical metrics: alpha, beta, R-squared, standard deviation, and Sharpe ratio:[2]
Key Metrics | Used For | How to Read |
Alpha (α) | Measuring an investment's performance relative to a benchmark index, such as the S&P 500. | +α%: Outperformed benchmark -α%: Underperformed benchmark α% = 0: Performed in line with the benchmark |
Beta (β) | Measuring the volatility of an investment relative to the overall market. | β > 1: More volatile than the market β < 1: Less volatile than the market β = 1: In line with the market |
R-Squared (R²) | Assessing how closely the fund's performance is tied to the benchmark. | R² close to 100%: Movement closely tracks benchmark R² close to 0%: Moves independently from benchmark |
Standard Deviation (σ) | Quantifying total risk, including systematic and unsystematic risks. | Higher σ: Greater risk due to high return variability (increased possibility of high gains and significant losses) |
Sharpe Ratio (S) | Assessing the risk-adjusted return of an investment. | < 1: Poor risk-adjusted return 1 - 1.99: Acceptable/good return 2 - 2.99: Very good return ≥ 3: Excellent risk-adjusted return |
(Data Source from: https://www.investopedia.com/articles/investing/032415/how-investment-risk-quantified.asp)
3.Learn about the asset management company or broker
When evaluating an investment fund, it’s just as important to research the firm managing it as it is to analyze the fund’s performance. Think of it like buying stocks—you wouldn’t invest without first looking into the company behind them. The same goes for asset management companies or brokers. A reputable, experienced management team can offer stability and steady returns, while a less experienced or poorly aligned firm could increase your exposure to unnecessary risks.
Top 5 highest performing worldwide funds
According to data compiled by Interactive Investors, the following are the top-performing investment funds globally, ranked from highest to lowest based on their YTD performance:[3]
Tiger Brokers: make your investment in funds easier
Since the 2020s, volatility, as measured by the CBOE Volatility Index(VIX), has consistently surpassed levels seen during the relatively stable 2015s[4]. As a result, investment funds’ returns have become more uncertain than ever.
With this situation, it’s possible for investors to seize the potential for outsized returns, but on the other hand, they must also deal with the possibility of significant reductions in portfolio value.
Tiger Brokers presents Tiger Trade, a trading platform that provides access to global securities markets, including the NYSE, NASDAQ, and major Asian exchanges, with lower online commission fees and no platform charges. A wide selection of over 1,000 public funds and low investment threshold starting from 100 SGD. Find out more about Tiger Trade now!
Reference
[1]Available at: https://www.icifactbook.org/pdf/2024-factbook-quick-facts-guide.pdf
[2]Available at: https://www.investopedia.com/articles/investing/032415/how-investment-risk-quantified.asp
[4]Available at: https://www.macrotrends.net/2603/vix-volatility-index-historical-chart
Disclaimer: *T&Cs apply. Please refer to our website at https://www.itiger.com/sg for further details. Investing in Unit Trusts and other financial products carries inherent risks, including the potential for loss. Past performance is not a guarantee of future results. The information provided does not consider your specific investment objectives, financial situation, or needs. It is not an offer, recommendation, or solicitation, nor does it predict future performance. Please read the disclosure statements and terms on our website and consider whether obtaining or continuing to hold financial products is suitable for you before opening an account or making investment decisions. Before making any investment decisions, consult your financial adviser to consider whether this information is appropriate to your needs, objectives, and circumstances. Tiger Brokers (Singapore) Pte. Ltd. assumes no responsibility or liability for any consequences arising from reliance on this information. This advertisement has not been reviewed by the Monetary Authority of Singapore. Tiger Brokers (Singapore) Pte. Ltd. (Reg. No. 201810449W).