Thread by @SAH16928046

I will not invest in a mutual fund, until and unless I won't carry out specific due diligence of my own.
These @MorningstarInc style fund reports are not very helpful.
You should know inside out about the management and especially the fund manager who will be managing your money.

The standard Bull Shit advice marketed in the industry by investor relations and advisory experts =>
Maybe you can check out the Sharpe and Sortino ratios for funds before investing.

If you understand risk management concepts, do check out the VaR - Value at risk figures of all the competing funds drawn from the universe of investment possibilities.

If you are really into financial economics and portfolio investment optimization models, you can use a software optimizer to build your own investment portfolio, based on the required rate of returns and betas of each potential asset class (for e.g. listed stock/s).

The CAP -M helps you to understand the efficient frontier and the risk-reward trade-offs better.
But that is not a be-all and an end-all principle by itself!
Risk and Portfolio Financial Analysis can go on and on!
Keep it parsimonious, like Franciscan Monk #Occam used to profess.

Mutual Funds, usually, cannot short financial assets due to regulatory constraints across many markets. Hence, they would not be in a position to use derivatives without violating the financial regulations and financial marker laws!

Hedge funds use derivatives in abundance! that is their bread and butter product in most cases.
A Long / Short Fund is an example.

Diversify and reduce financial risks using the risk pooling method. For e.g. a Mutual Fund Portfolio is constructed by financial /actuarial science and risk experts to do exactly that!

Risk Sharing and Financing are the two other concepts, but I wouldn't cover those in this post. Don't want to overcomplicate this issue.

I believe Hedge Funds do more FX Trading and Speculation than Mutual Funds.
They primarily use #derivatives markets to execute transactions and place bets.

Always study the following before investing =>
Back — End Load structure
Front — End Load Structure
Management Fee charged as a percentage (%) of invested assets
Financial Performance measures adjusted for risk!
Whether the fund is the open-end or close end?

If any lock-in periods apply? Normally this works in Capital protected funds! So, do check, otherwise, you might end up paying a penalty amount in case of early redemption!
Whether the Fund is Listed or Non -Listed at the stock exchange.

Always check the Performance Rating of the Fund. Most of the Funds are rated by JCR -VIS and/or PACRA. The rating methodology of funds is assigned as per SECP Guidelines. Most of the fund ratings are done using the USA — Morning Star Fund (composite risk rating) methodology.

Re-check SEC Guidelines and rating agency guidelines on Fund ratings, as industry standards and regulations are different in different jurisdictions.
Always read the Market Risk disclaimer clearly before investing!

Check the Past total accounting and the compounded rate of return/s of the fund, e.g., the Annualized returns of the fund.
A track record of the last three years is helpful.

Don't pick funds that show a declining trend over the last three years. Ask the wealth adviser to explain the bad performances, if any!
Investigate and inquire about the Fund Manager!

And possibly gather more information about the CEO, CIO — Chief Investment Officer and CRO — Chief risk officer in charge of managing the portfolios. They are certain fund managers that have outperformed their peers!

Make sure your fund manager has a sound reputation and no adverse publicity affects his image, as this can have operational consequences for your portfolio!

Gathering market intelligence about the fund and the sponsors of the Asset management firm is of utmost importance in developing markets.
Don't take the sales agent/wealth advisory sections to advise at its face - value! Most of them exaggerate.

Ask them to produce a risk to reward dashboards that you can analyze.
If you have a Finance/ Risk / Economics background, ask for more sophisticated measures of portfolio risk and return attribution/analytics!

Like ->

Sharpe ratio, Treynor Ratio, Calmer Ratio, M^2 (Modigliani — Modigliani), Sortino ratio (for bond and other fixed-income style funds), and check the Value at Risk of the Fund
Compare the Value at risk with the MDD — Maximum draw-down of the fund.

MDD is significant! If you select the MDD (Maximum draw-down) it should be in terms of both the percentage fall from the highest to the lowest point and in terms of the number of day/s!
Always ask the Fund Manager to fully disclose the portfolio holdings.

Check and read the previously published Investment / Fund Manager risk reports for each fund.
Finally, again check the Management Rating of each fund too! Many Rating Firms do due diligence on asset management companies and assign management ratings based on the quality

of the gatekeepers (risk/ audit/ compliance professionals hired) and other key personnel working at the fund.

For Islamic Funds, always check the SAC — Sharia Advisory Committees composition, ask for the Fatwas copy(if possible) and recheck the legal/ shariah compliance status and audit minutes of the Islamic fund!

Additionally, → Ask for the portfolio composition and check for yourself if Tawarruq and Commodity Murabahah is acceptable to your faith or not?
Certain Moslems do not accept CM and Tawarruq as acceptable modes of Financing and liquidity placement in Islamic Money Markets.

Let me know if you need any other advice!

Invest wisely

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