Don’t know which funds to choose when investing? Don’t stress; you will gain practical information in this blog that you can apply to help you invest for better outcomes.

There are more than 1500 unit-trusts in South Africa, making the task of picking funds just as difficult as picking a stock to outperform the benchmark or finding a needle in a haystack. We will be looking at the most important factors when deciding on a fund via its minimum disclosure document (MDD) or fund fact sheet. We will study the important parts of an MDD, then take three funds from three different ASISA categories and study their MDD to do some practical examples. An MDD provides a story about each fund, but first we need to know how to read the story.  Let’s begin.

ASISA Fund classification 

ASISA fund classification applies to all collective investment schemes (CIS) in South Africa. Unit trusts form part of CIS, and hence the classification applies. The aim of the classification is to establish a standard for every fund and categorise them according to their main asset class of investment. The naming convention works as follows: The first part is "Where,"  which indicates the geographic exposure of the fund. The second part is followed by “what”, that indicates the main asset class the fund will be invested in. Knowing the classification of your fund tells the first part of the fund's story.

Track record: Track record creates a feeling of trust in the fund, knowing that it’s been around for an amount of time to prove its worth. Fund managers can have short term outperformance of their benchmarks, but doing this over longer periods becomes more difficult. We recommend that the fund you are researching be at least 5 years old. This can be found either by looking at the inception date of the fund or if they show a performance number for the fund longer than 5 years.

Fund objective: The fund objective will give you guidance as to what the fund is trying to achieve and if the desired outcome is what you are looking for from the investment. There is no specific naming convention for this on the MDD, so look for anything relating to fund-, investment-, or return objectives.

Term and risk profile: Due to the lack of standardisation of MDDs, these two factors must be studied together to give you an idea of the risk level of the fund and how long the investment manager recommends being invested in their fund. Look for an indication of the minimum investment term suggested, and if a risk indicator is provided, suggest the risk level.

Performance vs. Benchmark: As the saying goes, the proof is in the pudding. It’s all good and well to say that you want to achieve a target, but if you are not doing it, then there must be a better manager out there in this category. Your fund should be outperforming its benchmark, at least for the period it suggests that you need to be invested for, and hopefully longer. If your fund is underperforming the benchmark over the recommended investment period, try either to invest in its benchmark or do more research on its competitors' funds that you can find here.

Fund one: Old mutual Global equity feeder fund

ASISA Fund category: This fund falls in the Global-Equity-General section. Using our fund classification rules we know “where” the fund invests is globally and in general equities is the “what” the fund invests in.

Fund two: Allan Gray Balanced fund

ASISA Fund category: This fund falls in the South African-Multi Asset-High Equity section. Using our fund classification rules, we know “where” the fund invests is South Africa, and in multi asset high equity is the “what” the fund invests in mainly.

Fund three: Prescient Income Provider Fund

ASISA Fund category: This fund falls in the South African-Multi Asset-Income section. Using our fund classification rules, we know “where” the fund invests is South Africa and in Multi Asset where Income generating investments are the “what” the fund invests in mainly.

There are other factors that will have to be considered too, such as cost and minimum investment amounts, but the criteria we discussed will sort funds according to your investment needs and provide you with some surety that the fund is not a fly by night and has proven itself over a long period. Using the suggestions provided should help you invest better.

* This is not financial advice; please do your own research on funds. 

* Historical returns are not a guarantee for future performance

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