3-5 What to Check When Choosing a Fund
A page working through a fund in order — what is inside, cost where relevant, and overlap with what you already hold
So far we have looked at what is inside a fund, how it is run, and how distributions work. Finally, here is what to check when actually choosing one. It is tempting to start from a popularity ranking or a recommended list, but here we narrow the flow to three steps. First, look at the fund's contents and confirm which countries and assets it invests in. If similar products exist, compare cost. If you already hold something, check overlap last.
- The first thing to look at is which countries and assets the product invests in.
- Whether it is equity-centred, bond-centred, or a mix of several assets changes how it moves.
- Where products have similar contents, you can compare costs such as the expense ratio.
- If you already hold a fund, check whether the contents overlap.
1. Start with which countries and assets it invests in
Similar names can hide quite different contents. The first thing to look at is which countries and assets the fund invests in. Whether it is equity-centred, bond-centred, or a combination of equities and bonds changes the character of its movement.
2. Where similar products exist, compare cost
If several products have very similar contents, you can compare costs such as the expense ratio. When they track a similar index and invest in comparable countries and assets, a cost gap can matter over the long term.
That said, comparing cost is only a secondary check. Comparing products with different contents on cost alone — an equity-centred product against a bond-centred one, or global equities against US bonds — does not answer which to choose. Keep the order: look at contents first, and compare cost only where products are similar.
3. Check overlap with what you already hold
If you already hold a fund, check whether the one you are about to buy overlaps in contents. Even holding several funds, if the companies and regions inside are largely the same, you may simply be holding more of the same thing.
Global equities and the S&P 500, for instance, look like separate products, but both contain a lot of US equities, so they overlap. More funds = more diversified does not hold. What matters is not how many you hold but what you are stacking up.
Looking at that overlap across the whole portfolio is covered in 4-2 The three axes of diversification. For a concrete look at the overlap between global equities and the S&P 500, the column Does holding both global equities and the S&P 500 give you diversification? is also useful.
That is the end of Chapter 3. Next, on to 4-1 What is a portfolio?, which connects products including funds to the overall design question of what to hold and how much.