How to choose a fund: five checks in order

A fund is chosen not by its name or by a chart of a past period but by a sequence of checks: what is inside, how much the management company charges for its work, how closely the fund tracks its benchmark, how it trades on the exchange and what legal wrapper all of this comes in. The order matters more here than completeness: if the first check fails, the rest will not save you — you will simply buy the wrong asset class. The list of funds available on the Russian market is in the funds section.

Step 1. What is inside the fund

A fund is not a separate asset but packaging for a set of assets. That is why you should start with the contents, not with the wrapper. Read in the fund's trust management rules which benchmark the fund follows and what exactly it holds: equities, bonds, money market instruments, gold, units of other funds. The entire behaviour of the security depends on this — an equity fund and a bond fund behave differently not because one is better managed, but because different mechanisms are at work inside. The difference between a share, a bond and a fund unit is worth keeping in mind before the purchase, not after it.

The second question of the same step is how the fund builds its portfolio. Full replication of the index, sampling from it, buying units of a foreign fund or the manager's own strategy — these are four different structures with different risks. Check separately what the fund does with the dividends and coupons that come in from the securities inside: whether it reinvests them in the same portfolio or pays them out to unitholders. Reinvestment is more typical of Russian exchange-traded funds — in that case you will not see any payouts in your account, and their effect will show up in the unit price. If a stream of payments is precisely what you need, a fund may turn out to be the wrong instrument; in that case look towards direct purchases and the payout calendar — for example, {{dividend_calendar|limit=5}}.

Step 2. How much the fund charges for its work

The management fee is the only figure in this story that is known in advance and applies whatever the outcome. It is not debited as a separate payment: it is withheld from the fund's assets, so you will not find it in your broker's statement — it sits in the unit price. The total fee includes the share of the management company, the depositary, the registrar and other expenses — what matters is the aggregate figure from the fund's rules, not its most visible part.

Comparing fees makes sense only within one category: a money market fund and an equity fund solve different problems, and cheap does not mean more suitable. But two funds on one and the same benchmark are compared almost entirely on costs — with similar holdings, the more expensive fund loses systematically, and the longer you hold it, the more it loses.

Step 3. How closely the fund follows its benchmark

A fund that promises to replicate an index always lags behind it — by the amount of its costs and by execution errors. This difference is the quality of the manager's work. Look not at one period but at several in a row: a steady lag of roughly the size of the fee is normal work, while a deviation that jumps in different directions is a sign of problems with execution or with the liquidity of the underlying assets.

Step 4. How the fund trades on the exchange

A unit is bought on the exchange, which means that the difference between the bid and ask orders is added to the price. The market maker has obligations to maintain quotes, but they do not apply at every moment: at the open, at the close and in periods of sharp moves the spread widens. Check whether the fund has a market maker, during which hours it operates and whether the management company publishes the net asset value per unit — the reference point for a fair price. Buying without this reference point means that you agree to a price you have nothing to compare with.

Another practical question is availability. Not every fund is available through any broker, nor to every investor; some instruments require qualified investor status. This is a check not of the fund but of the combination "the fund plus your account", and it has to be done before you draw up a plan. The order of checks for choosing the intermediary itself is covered separately — how to choose a broker.

Step 5. Whose wrapper it is and what about taxes

The last step is the legal structure. A Russian exchange-traded unit fund, a closed-end fund and a unit of a foreign fund differ not in return but in who is answerable to you, where the assets are held and what infrastructure stands between you and the securities. Events of recent years have shown that a long custody chain is a risk in its own right, unrelated to the quality of the assets inside.

The tax side also depends on the wrapper: the procedure for calculating the tax base on transactions with fund units is set by law — 13%. Find out separately whether the fund has tax withheld on the income inside the portfolio: a Russian fund that buys shares such as {{instrument:SBER}} and a fund invested in foreign securities will find themselves in different positions, and this is a difference in the final result, not a formality.

Why past returns are not among the checks

They are left out of the list deliberately. The return over a past period describes the behaviour of the benchmark, not the work of the manager, and says nothing about the next period. The only thing it is good for is comparing a fund with its own index, that is, step 3. To compare funds with each other, use the holdings, the fee and the tracking accuracy.

Where to look for the source data

The composition of the benchmark is checked against the market of the underlying assets: equities and OFZ make it clear what exactly the fund gathers into itself. Unfamiliar terms from the fund's rules are explained in the glossary. If after step 1 it turns out that you need a predictable payment rather than a share in a portfolio, it makes more sense to go to choosing a bond — the order of checks is different there.