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Tips for Choosing a Mutual Fund for Beginners

By Isny Dewi R

05 January 2021

How to choose the right mutual fund for beginners.

Photo source: Pexels
 
 
Are you interested in starting investing but still confused about which instrument is the most appropriate? If so, maybe mutual fund could be a smart choice. Because this instrument is suitable for beginners because the funds deposited will later be managed by a professional investment manager.
 
Quoting the website of the Financial Services Authority (OJK), according to the Capital Market Law Number 8 of 1995, mutual fund is one of the platforms used by people to raise funds.
 
By investing in mutual fund, you will get several benefits such as having an automatic diversified investment instrument, small initial investment capital, can be topped up and withdrawn at any time, and tax free.
 
In simple terms, by investing in mutual fund, people will provide contributions. Once collected, these contribution funds will be managed as a form of investment by the investment manager into a securities portfolio.
 
There are many types of mutual funds when viewed from the securities portfolio. There are money market funds, fixed income mutual funds, mixed mutual funds, equity funds, protected mutual funds, index funds, guaranteed mutual funds, and Exchanged Traded Funds (ETFs).
 
For those of you who are still unfamiliar, here's how to choose the right mutual fund for beginners, as reported by Lifepal:
 
1. Get to know the Investment Manager of the Mutual Fund
The prospectus on a mutual fund product contains a lot of information related to mutual fund management, investment restrictions, and the people behind the investment manager company.
 
Finding out the track record of an investment manager (MI) is important for you. In an era of information disclosure like today, it is not difficult to know whether the MI you will choose has been involved in a case, or has violated the law.
 
You also have to find out the amount of funds under management or asset under management (AUM) of the investment manager company. If an MI company has a large amount of AUM, it indicates the high level of investor confidence in the company. This is because investors will not simply entrust their funds to be managed by MI with poor performance.
 
2. Pay attention to the Sharpe Ratio
When someone chooses an investment instrument with high volatility, they also expects high returns. Sharpe ratio can be used to determine the risk level of a mutual fund. However, there is no benchmark for the best sharpe ratio.
 
Sharpe ratio itself is a ratio to measure mutual fund performance with a ratio of returns and risks (standard deviation). The higher the sharpe ratio, the better the mutual fund performance.
 
If you find a negative sharpe ratio value in mutual fund product, it is advisable to choose a mutual fund that has the smallest negative sharpe ratio. A negative sharpe ratio indicates the level of risk is greater than the rate of return.
 
If you buy a mutual fund on a platform owned by a mutual fund selling agent or securities company, you can see the ratio value on the list of mutual fund. The sharpe ratio value can change. It is possible for a stock mutual fund to have a high share ratio within three months but minus in a period of one year.
 
3. Note the Draw Down Value
Draw down can be interpreted as the maximum loss rate on mutual fund product, or it can also be interpreted as the level of decline in performance from its peak to its lowest point. If a mutual fund product has a draw down value of 30 percent a year, it means that its performance has decreased by 30 percent.
 
The draw down value can be affected by the time frame. For most money market mutual funds, the draw down value is at 0 point. However, some have 0.00 percent value.
 
4. Beware of Mutual Fund Expense Ratio
Expense ratio is also referred to as the comparison of mutual fund operating expenses with the average NAV (Net Asset Value) in a year. Managing a mutual fund will certainly incur costs, such as custodial, trading, marketing, and others. If the expense ratio for a mutual fund is getting smaller, it means that the Investment Manager is reliable in managing its products.
 
5. Choose Mutual Fund According to Your Investment Period
The shorter the investment period, the mutual fund options that will be suggested are those with low NAV volatility. If you choose long-term, the choice will be more flexible, you can choose mutual fund with low or high volatility because they expect large returns.
 
For short term (1-3 years), it is highly recommended to choose mutual fund with low fluctuation such as money market fund, or fixed income fund. For the medium term (3-5 years), it is advisable to choose money market, fixed income, and mixed mutual funds. Meanwhile, for education fund needs (over 5 years), equity mutual funds should be considered.

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