There is no doubt that one of the most important decisions of our finances is to decide how we manage savings. Investment funds represent one of the many financial products that help those building their savings account.
There are as many types of investment funds as there are investment strategies. Their fact can mean that the saver feels overwhelmed and undecided when it comes to subscribing shares, not knowing how to make an accurate decision in many cases. Here are four steps to help you choose an investment fund for your savings.
Determine savings and investment goals
The prelude to the investment is saving. The purpose of all investments is to increase wealth. We must keep in mind what sense is given to both saving and investment. Associating these concepts with a material and concrete objective will help us to maintain consistency and discipline.
Do we want to buy a car or other property of a lasting nature? Are we saving for an event in the future? In short, each euro must have an assigned destination engraved. The minimum objective to preserve savings (maintain capital while we decide what to do with it) will overcome inflation.
The objectives must be concrete (the more concrete, the better). Just as it is necessary to quantify the objective, translate it into a monetary figure. After their, a temporary period must be established to achieve it. The objectives must be realistic in terms of amount and term.
The investment term is an important factor in selecting the type of investment fund most adapted to our financial needs. Therefore, both the objective and the deadline are two key aspects of any investment.
Set the maximum risk to assume
Establishing the risk profile involves having to do introspective work since it depends largely on a psychological factor inherent to each saver.
Concepts such as age, income, family situation, and other personal issues influence when defining our profile as an investor. But in short, every saver knows where he has their psychological cap. If not, there is a trick that works very well:
When we are clear about the maximum level of risk, we can assume without suffering serious economic and emotional damage; we can choose the objective of profitability.
Profitability and risk are two concepts that are intimately and related. The higher the return, the greater the risk. There will always be the case in the investment world. Beware of those who promise high profitability with little risk.
Therefore, the level of risk is established first, and then the best return adapted to that level will be sought. Doing it in reverse is a serious mistake.
Pre-select investment funds related to you
After the introspection work, we will have to carry out the research work. Luckily, some fundraisers make their tasks much easier. In addition, as soon as the saver is clear about the objective, the time horizon, and the risk, it will be much easier to find the ideal savings product.
Now is when the star question comes, fixed income, equities, or a mixed fund?
Neither fixed income, nor variable income, nor the combination of both types is good or bad by themselves; everything depends on the economic situation and our profitability and risk objectives.
We must inform ourselves how much the fixed income is performing in general terms and if their profitability is consistent with our objective. That being the case, we would not have to assume a greater risk unnecessarily.
Unfortunately, the fixed income in recent times is not giving a good return, thus being necessary to include a percentage of variable income to the portfolio to achieve the monetary objectives in the marked horizon.
One thing that should be clear, the variable income is not suitable for short-term objectives. Due to the volatility it presents, it can ruin our investment strategy. Therefore, as we get closer to the end of the savings period, we must choose a more conservative investment philosophy.
If the variable income can lose 10% in a year and our time horizon is two years, will there be material time for the investment to recover? It is unlikely. Their type of asset works very well for longer horizons; however, you can incorporate a percentage into any portfolio to give it an extra return without losing sight of the risk profile.
In short, we must inform ourselves of the risk and profitability of each category of investment funds. In their way, we can limit the universe of these products to the preselection of funds related to our strategy.
Read the DFI of the pre-selected fund carefully
The Document of Fundamental Data for the Investor (DFI), formerly called a simplified informative brochure of the fund, is mandatory delivery to the investor before subscribing to the investment fund’s participation.
Their document summarizes all the relevant background information, which the saver must know to make an informed investment decision. Once an investment fund has been pre-selected, it is necessary to make sure that it fits our needs through their document.
When the saver has their information in their knowledge, they can decide to manage their savings and choose the right investment fund. The next step is to execute the subscription of shares in the selected investment fund.
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