Investment has countless ways, but risk is the most important.

When it comes to selecting an outstanding fund, there are many factors to consider, and among them, fund indicators are one of the indispensable important factors. This article will guide you through the 2 essential indicators to look at when buying funds.

As everyone knows, when we see a fund, we click into its basic indicators and see a variety of dazzling indicators. However, not all of these indicators are important, and only a small part is useful.

Therefore, this article will share 2 essential indicators for selecting funds, as follows:

1. Sharpe Ratio

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Firstly, it is necessary to understand what the Sharpe Ratio is.

The Sharpe Ratio, also known as the risk-return ratio, represents the excess return brought by the fund for each additional unit of risk.

The Sharpe Ratio takes into account both the expected return on investment and the investment risk, making it a comprehensive performance indicator with strong applicability. Therefore, it is now widely used in evaluating investment return levels, optimizing investment portfolios, and guiding investment decisions.

Let's take a look at the formula for the Sharpe Ratio, as follows:Translate the following text into English:

E(Rp): The expected annualized rate of return of the investment portfolio

Rf: The risk-free rate (usually represented by the yield on 10-year government bonds)

σp: The standard deviation of the annualized rate of return of the investment portfolio (that is, the volatility or risk faced when trying to achieve this rate of return)

Note: The risk-free rate represents the rate of return that can be obtained with almost no risk, so government bonds are commonly used as a representative.

Assuming that our current expected annual return is 12%, the risk-free rate is taken as 3%, and the volatility is taken as 5%, then according to the formula, we get:

(12% - 3%) ÷ 5% = 1.8%That is to say, for every 1% of risk we undertake, we can obtain a 1.8% excess return, which seems to be a very cost-effective thing.

Under normal circumstances, if the Sharpe ratio is greater than 1, it indicates that the fund's excess return is far greater than the risk it faces. If the Sharpe ratio is less than 1 but greater than 0, it indicates that the fund's risk is close to its rate of return, and it still has a certain advantage at this time.

If the Sharpe ratio is negative, it indicates that the fund's risk is much higher than its rate of return, and it is essential to stay away from such funds.

The famous stock god Warren Buffett manages Berkshire Hathaway, and its Sharpe ratio is 0.79, which also indicates that its excess return is relatively obvious and is also excellent.

Therefore, when we choose a fund, the higher the Sharpe ratio, the better. The minimum should be 0.5, and the longer the high Sharpe ratio, the more convincing it is, which also indicates a higher investment cost-effectiveness.2. Maximum Drawdown

As the term suggests, maximum drawdown refers to the extent to which the net value of a fund falls from its peak to its trough during a certain period. Maximum drawdown typically represents the risk awareness and the ability to control risk of the fund manager.

The formula for maximum drawdown is:

(Peak Net Value - Trough Net Value) ÷ Peak Net Value × 100%

Buffett's first investment maxim is: "Do not lose money," and the second is: "Remember the first one." The key emphasis here is that the primary task of investing is to learn to preserve capital and to have sufficient risk awareness.

Generally speaking, the longer the period, the lower the maximum drawdown, which better indicates the fund manager's high risk control awareness.

The reference standard is: the maximum drawdown in the past 5 years is less than 25%, with an upper limit of 30%. Exceeding this value requires high caution.Note: Here, the reference period is chosen to be 5 years. The reason is that within 5 years, the market will at least go through one cycle of bull and bear conversion, which can better reflect the risk control level of the fund manager.

Summary

The Sharpe Ratio and Maximum Drawdown are two very important indicators when selecting funds. One represents the comprehensive investment cost-effectiveness of the fund, and the other represents the risk control level of the fund. They have significant reference significance for selecting high-quality funds.

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