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Fund selection

Choosing a fund is the most important decision in the funded pensions system. It must be done carefully and considering all the aspects. A decision should not be made on the basis of emotions, but with great consideration. However, you must start from somewhere. How to make a right fund selection?

1. Choose a risk level

The risk level of each fund is described in the fund prospectus, and the risk classes (1-7) in the funds’ Key Investor Information Documents.

The proportion of equity in the fund’s investments determines the fund’s risk level: the larger the share of equity, the greater the investment risk.

  • Conservative funds, which have the lowest investment risk, invest into bonds and bond funds and up to 10% into equity.
  • Funds with the highest investment risk are allowed to invest the entire value of the fund’s assets into equity.

Higher risk level generally correlates with higher potential yields.

When choosing a pension fund, it is important to think not only about risk tolerance but the length of the investment – how many years you have left until you reach retirement age. When investing into equity markets, remember that prices of equity can fluctuate dramatically, an investor nearing retirement should think twice about investing into pension fund units with a high equity risk.

Besides the fund prospectus, terms and conditions and Key Investor Information Document, it is advisable to keep up with the fund’s monthly reports. The documents are available on the fund manager’s website and here:

Second-pillar funds
Third-pillar funds

2. Choose the style of investment

The style of investment shows how the assets of a fund are managed. The styles can be grouped differently, but the most common option is to classify funds as active and passive.

  • The actively managed funds are managed actively. The main characteristic of the active style is the choice of equity based on analysis of securities. The fund manager will try to time the transactions and hit the peaks and bottoms of price fluctuations: by selling high and buying low, additional profit is yielded from the movement of the prices.
  • The passively managed funds are so to speak “not managed”. Based on certain policy, the fund manager invests all of the money into securities, other funds and stock indexes and achieves average rate of return of the securities market. The passive strategy is characterised by the constantly average rate of return without significant growth or plunges.

3. Choose a fund

The fund management company plays an important role in choosing a fund. The investor of a pension fund actually chooses people to whom he or she trusts the pension savings. These people invest his or her money and in case of possible mistakes, they have to take the responsibility.

Universal model for action:

  • establish your investment aim,
  • choose the suitable risk level that meets your risk tolerance,
  • choose the suitable style of investment (active or passive),
  • choose the fund management company and the most suitable fund from among the funds managed by that company.