5 Things to Consider When Choosing An Investment Fund: Expense Ratio & More

As catchy as names like $FOMO and $SHE can be, an investment fund is more than just a ticker. As you sift through your options, you'll have many questions that will need answering. Should you choose active or passive funds? Where's your red line on fees?

Let's dig into these questions and more below.

1. Check the index that the fund tracks 

Index funds get their name because they track an index.

While you're researching funds to add to your portfolio, it's essential to review the performance of the index the fund tracks. It could be a popular index like the Standard & Poor 500, or a more niche one from the fund manager. To compare this to international markets, they're similar to indices like the DFM General Index and DFM Shari'a Index in the UAE.

You can also compare the fund's performance to the index's performance to get a better overall picture of how the fund performs. Just know that index performance is usually more predictable.

2. Is the fund actively or passively managed?

Actively managed funds are typically more expensive because professional fund managers and their teams manage them. However, these funds are more likely to outperform indices or benchmarks. 

A passively managed fund does not use a manager or investment team. These funds are more likely to use automation with some human intervention, like robo advisors or index funds. They typically mirror an index's performance without outperforming the index. 

3. Consider the style, type, and size of the fund

You need to consider what type of fund you want to invest in (like mutual funds, exchange-traded funds, hedge funds, or money markets). These choices should be guided by your investment goals and time horizon. 

Funds have unique styles. A fund's style is the investment approach and main objective used by the fund manager. The strategy and objectives direct the manager's trading choices for the portfolio. 

Different funds also come in different sizes. A fund's size refers to its total asset base, the amount of money that the fund manager can use to invest. Check the assets under management (AUM) to see how big a fund is.

4. Check the expense ratio and other operating costs 

A fund's operating expenses include management and transaction fees, which get reported as a percentage of the fund's assets.

These operating expenses are known as the expense ratio and are communicated to investors via the fund prospectus.  

Active funds usually have expense ratios between 0.5 – 1.0%. Passive funds cost less to operate, so you'll see an expense ratio like 0.2% or similar. 

5. Research past performance of funds and manager

How have the funds you've chosen performed the past few quarters, and even the last few years? This will give you an idea of its volatility and what kind of time horizon it works for.

Then, ask yourself: Has the fund manager met the fund's objectives?

This research will help sharpen your knowledge of investment funds in the US market.