From defining the goal to selecting the type of fund to comparing and making the final decision: follow these six steps to the right ETF or equity fund.
• Find the right investment in six steps
• From goal definition to product selection to the final decision
• Basics and differences between ETFs and stock funds
The DKB has drawn up a checklist that is intended to help investors find the right investment product in 6 steps.
Step 1: What goal should the system pursue?
The first thing experts say investors should be clear about is: What is the goal? It is also important to be clear about how long the money should be invested, because the investment periods vary greatly. Other points include whether sustainability is important to investors in their investments or what profits are expected. When it comes to risk minimization, there are two key aspects that should be taken into account: the duration and the diversification of the investment.
If an investment is invested over a longer period of time, it has more time to make up for possible losses. If the investment is also broad, you are not dependent on the values of a single industry.
Step 2: Narrow down the possible investment products
Next, investors should decide on a type of fund. If the money is to be invested for the longer term, stock funds and ETFs are suitable. Investors can adjust the risk involved according to their own needs by adjusting the duration and spread of the investment. In a stock fund, the money of many investors is invested in shares of various companies. The profit is then paid out by the fund company after deducting the costs incurred.
An ETF is an exchange-traded fund that replicates an index such as the DAX or MSCI World as closely as possible. To do this, it automatically invests in the values contained in the index. If the index rises or falls, the ETF follows this development. Since no active management is necessary, the costs are low. ETFs can be bought, sold or sent flexibly Savings plan save.
Next, investors should think about the composition of the fund. Among the actively managed funds, there are pure equity funds but also so-called mixed funds. Mixed funds also contain, for example, bonds, real estate or raw materials. Riskier asset classes present greater dangers or risks and are therefore offset by less risky asset classes within the fund. However, this also reduces the returns. There are also costs for fund management.
Funds and ETFs either distribute income or reinvest it automatically. Accumulating funds use compound interest, but have been obliged to pay an advance tax flat rate since 2018. That’s why many providers have switched to distributing variants. Distributions can be reinvested to build wealth.
When it comes to sustainable investments, the focus is on economic, but also ecological and social aspects. Responsible corporate management is also crucial in the selection. Such investments do not take into account companies or even entire sectors that do not meet certain sustainability criteria.
Step 3: Check the “Key Investor Information”
Now it’s about investors taking a closer look at a specific investment product. To do this, you can, for example, use the securities search of your bank or your online broker. Another option is to use a fund or ETF finder on the Internet. There you could search for the provider or the product name. If investors already have a clear idea of which fund or ETF they are looking for, they can also enter the securities identification number (WKN).
The first thing investors should do then is to look at the “key investor information document” (wAI). This is an information sheet that is available for every fund and ETF. In this information sheet, particular attention should be paid to the following three points:
The Total Expense Ration (TER) is important because it shows you the total annual costs of a fund in relation to the fund’s volume. However, the transaction costs are not taken into account here. The total expense ratio is an important comparison criterion because even small differences have a noticeable impact on returns over long investment periods.
Funds are also divided into seven risk classes based, among other things, on volatility over the last five years. Class 1 stands for very low and class 7 for very high price fluctuations. This means investors can see at a glance how risky a fund is.
The fund volume shows the total capital of a fund. Experts recommend investing in funds starting at 50 million euros, as larger funds are considered safer. The age of a fund is also important because it provides a meaningful reference to previous investments.
Step 4: Checking the fund portrait
Next, investors should check the fund portrait. This contains further important information that could help with the selection: The fund currency is usually irrelevant, but when investing in other countries it can influence the return due to exchange rates. The replication method shows how an ETF replicates its index – physically via the original values or synthetically via swap. A swap is often more cost-effective. For actively managed funds, it is worth taking a look at the experience and stability of the fund management.
Step 5: Compare fund and ETF selection
Ratings and chart comparisons can help to further refine your fund and ETF selection. Professional rating agencies evaluate funds based on objective criteria and award stars, letters or points. For actively managed funds, it is also worth taking a look at their further development compared to a suitable index.
Step 6: Select the right fund or ETF
Finally, it is best for investors to go through all the information that was collected on the way through the first-time investor maze. You should also remember your own ideas and goals.
The most important information about funds and ETFs at a glance:
Both have a lower risk of loss than direct investments in stocks.
Funds and ETFs are intended for long-term investments.
ETFs are generally more cost-effective than actively managed funds because there are no additional costs for fund management.
Editorial team finanzen.net