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NOTE

How to Invest in Funds

English translation of the original VNote “How to Invest in Funds”, preserving its structure with only necessary small corrections.

InvestingUpdated 5 min readhistorical

This is a historical learning note and may contain outdated or incomplete understanding.

Note: The original VNote structure and historical views are preserved. Product rules, returns, policies, and specific assets are time-sensitive; only clear errors or changed institutional rules are corrected minimally. This is not investment advice.

Historical screening rules: the fund-size thresholds, manager-tenure rules, institutional-holding percentages, regular-investment dates, and fixed take-profit levels on this page are heuristics recorded in the original note, not universally valid hard rules.

1. Keep a Stable Mindset

Behavioral Economics

2. Funds the Original Note Says Not to Buy

The note warned against buying funds characterized by crowded holdings + high industry momentum + exceptionally strong recent performance. Its reasoning was that fund companies may operate an internal “horse-racing” mechanism, with one manager in each track; a manager promoted after strong performance may not repeat it the next year.

3. Selecting Funds

3.1. Money-Market Funds

3.1.1. Initial Screening on Morningstar

3.1.2. Further Screening by Parameters

  • Principal sufficiently safe
    • Fund-company size: the original note preferred companies managing more than 100 billion yuan.
    • Money-fund size: larger money funds may have advantages, but very large size can also affect efficiency.
    • Fund age: the original note preferred longer-established funds, generally 3-5 years or more.
  • Relatively higher return
    • Do not look only at one point in time; look at longer-term returns.
  • Low fees and convenient withdrawal
    • The note observed that subscription, redemption, management, and custody fee differences among money funds were relatively small.
    • The original note recorded T+1 confirmation for buying and selling; actual confirmation and cash-arrival timing should follow the latest rules of the specific fund.

3.2. Index Funds

3.2.1. Choose an Index

  • All indexes can be looked up at China Securities Index.
  • Principles recorded in the note
    • Breadth
      • The more stocks covered and the broader the screening criteria, the broader the index.
      • Examples: CSI 300, CSI 500, S&P 500.
    • Industry exposure
      • Defense, healthcare, etc.
    • Degree of subjectivity
      • Whether the index reflects the intended trend well.

3.2.2. Screen for an Undervalued Index

  1. Understand valuation indicators.
  1. “Paper-Folding” Method
    • Determine a reasonable valuation line.
    • Define undervalued, reasonable, and overvalued zones.
      • Correspond to buy, hold, and sell timing in the historical strategy.
      • Example from the note: A-share low valuation set at 20% and high valuation at 40%. If an index P/E is 10, buy below 10 * (1 - 20%) = 8 and sell above 10 * (1 + 40%) = 14.
      • These fixed percentages are historical heuristics, not universal valuation boundaries.

3.2.3. Choose the Index Fund with the Smallest Tracking Error

  • Tracking error
    • Average absolute daily tracking deviation.
    • Annualized tracking error.

3.3. Bond Funds

  1. Screen by historical performance.
    1. Current manager tenure above 3 years in the historical rule.
      1. The note assumed one bond bull/bear cycle was around three years and preferred managers who had experienced a full cycle.
    2. Fund size above 1 billion yuan.
      1. The note reasoned that very small funds can be affected more by large redemptions, especially during bond-market declines.
    3. Institutional ownership between 30% and 70%.
      1. Too little institutional interest was viewed negatively, while too much could create large-redemption risk.
  2. Compare return and risk: higher return and lower drawdown were preferred, using a return/drawdown ratio = annualized return over a period ÷ maximum drawdown over that period.

3.3.1. Initial Screening on Morningstar

  • Select fund type
    • Open-ended
    • Convertible-bond, aggressive bond, ordinary bond, pure bond, etc.
  • Fund size
    • 500 million to 5 billion yuan in the historical screen.
  • Performance above peer average
    • 3 months, 6 months, 1 year, 2 years, 3 years, 5 years.

3.3.2. Compare Selected Funds by Parameters

  • Stability of results
    • Lower standard deviation and beta were preferred in the historical screen.
  • Strength of performance
    • Higher alpha.
  • Risk-adjusted performance
    • Higher Sharpe ratio.
  • Bond-fund leverage
    • If the fund holds bonds above 100% of net assets, it is using leverage/repo financing.
  • Current fund-manager capability
    • Tenure
    • Composite ratings: Eastmoney, Howbuy
  • Overall fund-company strength

3.3.3. Review Regularly and Update

3.4. Active Funds

3.4.1. Method One

3.4.1.1. Initial Screening on Morningstar
  • Fund type
    • Open-ended
    • LOF, active management, mixed, etc.
  • Fund size
    • 500 million to 10 billion yuan in the historical rule.
  • Performance above peer average
    • 3 months, 6 months, 1 year, 2 years, 3 years, 5 years.
3.4.1.2. Compare Selected Funds by Parameters
  • Stability
    • Lower standard deviation and beta.
  • Ability to produce strong results
    • Higher alpha.
  • Risk-adjusted ability
    • Higher Sharpe ratio.
  • Current manager
    • Tenure
    • Composite ratings: Eastmoney, Howbuy
  • Fund holdings
    • Lower top-10 concentration was interpreted as more diversified.
    • Avoid excessive overlap among funds.
3.4.1.3. Review and Replace Regularly
  • Whether return/risk remains near the top
    • Repeat screening.
  • Whether the manager changed.
  • Replace funds with large changes.

3.4.2. Method Two

3.4.2.1. Choose Strong Fund Managers

Active Fund Managers

3.4.2.2. Research Fund Reports

Fund Reports

4. Buying Strategy

4.1. Regular Investing

4.1.1. Why Use Regular Investing?

  • The original note describes the A-share market as historically characterized by short bull markets and longer volatile/bear periods. Regular investing can buy more units at lower prices and average the cost basis.

Regular Investing vs. Lump-Sum Investing

If the market falls first and later rises, regular investing can look better; if it rises first and later falls, lump-sum investing can look better in the simplified examples.

Is Regular Investing Better Than Lump-Sum Buy-and-Hold? - Xueqiu

4.1.2. Timing Purchases

  • The note suggests avoiding starting regular investment late in a bull market or when valuation is very high.
  • Monthly or weekly investing can both work; exact date was considered less important.
    • For weekly investing, Monday, Thursday, or Friday were all viewed as acceptable.
    • For monthly investing, the note suggested avoiding mid-month.

4.1.3. If You Already Have a Lump Sum, How to Enter?

  • Initially place money in relatively safer products such as money-market or bond funds in the historical plan.
  • Divide the money into multiple parts and deploy them over time together with monthly contributions.
  • Invest spare money.
    • monthly spare money = (monthly income - monthly expenses) / 2
    • monthly regular-investment amount = (savings / 20) * risk coefficient
      • risk coefficient = (100 - current age)% – an historical heuristic from the original note; age alone cannot determine the appropriate risky-asset allocation.

5. Selling Strategy

5.1. Conservative Redemption

  • Original rule: if annualized return > 10%, redeem principal. A fixed take-profit threshold is not universally applicable.
  • Original rule: if annualized return > 20%, redeem all. A fixed take-profit threshold is not universally applicable.

5.2. Aggressive Redemption

  • Redeem half at a somewhat lower take-profit point.
  • Redeem the other half later.

6. Why Fund Investors Lose Money

Not researching fund holdings.

7. When to Cut a Fund Position

When it underperforms its performance benchmark, according to the original rule.

8. How Many Funds to Hold

  • The note cites a Morningstar study suggesting seven and says to adjust to personal circumstances.
  • At most one fund per manager, because funds run by the same manager may hold very similar portfolios.
  • Prefer at most one fund from a company/strategy group when holdings overlap heavily.
  • The historical note suggested 3-5 funds to spread manager-specific mistakes.

9. New Funds vs. Old Funds

  • New funds have an offering period and a portfolio-building period. During these periods, exposure and returns differ from a fully invested mature fund.
    • Offering period: historically recorded as about one week to one month.
    • Portfolio-building period: from about one month up to six months in the historical note, as positions are raised toward contractual targets.
  • The note recorded that new-fund initial-subscription fees were often less discounted while existing-fund subscription fees could be discounted through sales channels. Therefore the original note concluded there was no need to chase new funds simply because they were new.

10. References