Thursday, July 5, 2007

Choosing My Mutual Funds

The other day I was reading a Russian personal finance magazine. There was a review of mutual funds, and my two funds were named the best based on their performance in the last 6 months! I've been investing in them for 7 months. This report was a very pleasant surprise indeed, but I understand that 6 months is a very short period to draw any conclusions. What's important is that I have an inner feeling that I have made a right choice.

When I started investing, I was so naïve, so overwhelmed by a variety of available funds, I just couldn't choose the right one. Looking back, I'm glad I didn't make any of major errors that beginners are said to make usually.

Some basic things that I think I did right
1. I didn't base my choice only on past performance. There was one fund at that time that boasted about its 1-year 90% return (after fees, before taxes). Well, even considering that 2006 was a year of surprisingly high returns on Russian stock market, 90% was overwhelming, and thus very, very appealing. Luckily, I didn't yield to temptation. If I had put my money in this super fund 6 months ago, I would have been in the negative territory now.

2. I wasn't influenced by advertisements. There were a lot of aggressively advertised mutual funds, but I took an effort to look for more options and compare different funds. Some of those advertised funds turned out to be not so great at all.

3. I wanted to get good returns, of course, but I was not driven by greed. If I had been obsessed with the idea of getting the best return, I would have failed, because no one can predict the future performance, and no fund can be the best forever. So I decided to find funds which would give me good returns, run by a reliable company with good service.

The company
I found my ideal investment management company. It happened to be a subsidiary of my bank. I liked it because it offered a good index fund. It also turned out to be very convenient. The thing is, I couldn't just make a few clicks on a site, send a check or use a credit card - done. I had to visit the office of a company every time I wanted to make an investment, and this company had an office within a five-minute walk from my dorm which was open even on weekends! A bit later I found out it offered free Internet banking, so now I can invest using the Internet, though I haven't tried it yet. Also, due to the fact that this company is affiliated with my bank, I don't pay any fees for transferring money to my funds. It is big and super reliable - something you really want to double-check in Russia.

The funds
Choosing the right fund out of hundreds can be headache. I decided to choose my funds according to their strategies. That's how I ended up with an index fund and a fund, focused on an industry sector.

Fund #1
I think that six months ago index funds were not a popular kind of investments. I didn't see them advertised, they weren't included in popular surveys and reports because they were considered to be a special kind of mutual funds. I learned about index funds by spotting the offers at investment management companies' sites. What I did next was get more information about them and compare figures. It was a revelation for me that the majority of actively managed funds performed worse or close to indexes. So I thought - why not an index fund?

Fund #2
About a month after making my first payment to the fund #1, I decided to consider a mutual fund which invests in electric power industry. The reason is it is now the hottest industry sector in Russia. There was a single huge enterprise owned by the Russian government, but now it's being divided into many smaller enterprises which are going public. There's a lot of IPO's and buyings by strategic investors that eventually lead to the increase of the industry stocks.

So...
What I did was simply find an investment management company that was ideal for me, choose two of its funds with strategies I liked and start investing. So far it worked for me. I like the returns and the convenience of investment, provided by my investment company. And it turns out that, according to the magazine, it's the best placement I could have made 6 months ago - something I couldn't imagine half a year ago:)

8 comments:

matt said...

So, you are invested in an index fund that tracks Russian energy companies and...an index fund that tracks a broad Russian market index (just guessing on the second one)?

I like index funds as well. I have one that tracks Korean Large caps and another one that tracks the S&P ASX/200 (Australia).

This month, I'm looking into some extremely risky investments to park a lot of money.

GoldnSilver said...

Good for you Olga, many of us are still learning to invest, even investors that have been in the market for a while. I mean, the market is changing so fast, and there are new products launched everyday almost. But it looks like you've created a good thought process for yourself.

Addy said...

Good for you! I'm taking my first very timid steps into investing in the US market where there is SO much information, support, advice, and history available. I can't even imagine going into the much riskier and murkier waters of the Russian market, but I say... good for you! Great to see a non-US/Canada contribution to the personal finance world as well.

Olga said...

Matt, I just made it very unclear in my post. The fund which invests in energy companies (fund #2) is actually an actively managed one, because the first index of energy companies appeared probably only a couple of months ago. So far we don't have any index funds that track industry sectors.
You are perfectly right about the other one. It tracks a broad Russian market index called MICEX (or MMVB in Russian).

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