## Financial investment, those professional terms you have to master (Part 3)

When it comes to financial investment, those who have been following the recent capital market are well aware that over the past month, the market has been like a slide, falling again and again. If the stock market is like this, the fund market is also bound to suffer.

No matter how the market changes, some essential things remain constant and cannot change. Risk and opportunity are interdependent. Today, I would like to share some financial knowledge and professional terminology with everyone, hoping to provide some help to those who are about to enter the market.

In previous articles, I have shared with you the concept of what a fund is. This is just a broad concept.

Let's continue to clarify how to understand a fund and what it is composed of. Only when investors (buyers) grasp these can they clearly choose the funds they believe to be feasible and investable.

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(II) Rate of return, the rate of return is a professional term we are all familiar with when making any investment. However, in reality, many people only describe an expected rate of return (an uncertain expected risk rate) when talking about the so-called rate of return. In actual investment operations, we should pay more attention to the required rate of return, which is the result of the risk-free rate plus the risk rate. So, the weekly, monthly, annual, and other rates of return we see on a certain day or financial website platform are risk rates, not required rates of return.

Risk-free rate = pure interest rate + inflation compensation rate. These two data sources do not need to be calculated. Under normal circumstances, they are measured and controlled by relevant institutions. There is also a method to directly regard it as the national debt interest rate.

As for the consideration of risk in financial investment, it is more often obtained from the portfolio of securities. The most common in the capital market are funds and stocks, which are viewed in terms of the portfolio to see their returns. The portfolio risk referred to here does not mean the risk of the securities portfolio you have purchased. It refers to the risk of the asset portfolio that constitutes each fund and each stock. For example, when looking at the holdings of a new energy fund, you can usually see the top 10 holdings. Each stock has risks, and according to the market, industry, and so on, their various risks are different. Therefore, the risk and return of the fund are the weighted average of the risks of each stock. Similarly, if you choose a certain investment portfolio in the financial market, your final return is also calculated based on the weighted average of each asset. Therefore, there is the saying "Don't put all your eggs in one basket." Moreover, when the market is constantly fluctuating recently, there are always some people who are not much affected. It's not that they have chosen the right stocks and funds, but they have chosen the way of investment portfolio, which has reduced market risk.

(III) What is risk? It refers to the uncertainty of investment returns. That is, the actual return and the expected return deviate from each other, leading to investment failure and economic loss.

(IV) The main indicators for measuring risk rely on the variance, standard deviation, and correlation coefficient of the rate of return. In an investment portfolio, when it is necessary to diversify risks, the correlation coefficient should be at least -1. If it is 1, it is impossible to diversify investment risks. For example, if someone currently holds 5 stocks in one of their securities accounts, and three of them are in the same industry, one is a real estate stock, another is a cement stock, and one is a steel stock, their correlation is very strong. As long as one falls, the other two stocks will also fall. This is the characteristic of a correlation coefficient greater than 1. If all 5 are in different industries, then the correlation will be -1. Such risks can be completely diversified.Moving on to a detailed explanation, the fund investment style box: Classifies the investment style of each fund, with the basis of classification being the heavy stock holdings disclosed in the quarterly and annual reports of each fund. The specification is a 3*3 matrix. The vertical axis represents the size of the stock market value: large-cap stocks, mid-cap stocks, and small-cap stocks, indicating that the fund's investment direction is independent of the amount of fund investment; the horizontal axis represents the stock value-growth positioning: value, balanced, and growth.

Stock size: For listed companies on the Chinese A-share market, their stocks are categorized into large-cap, mid-cap, and small-cap based on their total market value. The specific classification criteria are as follows: Stocks are sorted in descending order according to their total market value, and the cumulative market value percentage Cum-Ratio corresponding to each stock is calculated, with 0 < Cum-Ratio ≤ 100%.

Large-cap stocks: Stocks with a cumulative market value percentage less than or equal to 70%, that is, satisfying Cum-Ratio ≤ 70%.

Mid-cap stocks: Stocks with a cumulative market value percentage between 70-90%, that is, satisfying 70% < Cum-Ratio ≤ 90%.

Small-cap stocks: Stocks with a cumulative market value percentage greater than 90%, that is, satisfying Cum-Ratio > 90%.

Fund characteristics: Two aspects: on the one hand, investment strategy, and on the other hand, asset allocation, that is, the proportion of stocks and bonds in a fund. Therefore, the risk and return are different.

References for choosing funds: 1 week, 1 month, 3 months, 6 months, 1 year, 2 years, 3 years, 5 years, etc. Following that is the risk assessment column. It includes six items: average return, standard deviation, Sharpe ratio, alpha coefficient, beta coefficient, and R-squared.

For example, China Advantage, GF Fund Wealth Accumulation, and GF Small Cap.

Sharpe ratio: It is a coefficient that combines return and risk, essentially the return divided by risk, the larger the number, the greater the return and risk.

Alpha coefficient: It represents the extent to which a fund can outperform the overall market. The larger the value, the better, as the fund's return exceeds the market.Beta Coefficient: This only indicates the volatility of a fund relative to the market index. For instance, an index fund would have a coefficient of 1, as it is designed to mirror the market index. A coefficient greater than 1 suggests that the fund's volatility exceeds that of the market, implying a higher risk; a coefficient less than 1 indicates a lower risk and less volatility than the market.

R-squared: It represents the correlation between the fund and the market index. If R=1, it indicates a perfect correlation with the market; if R<1, it suggests a negative correlation; this coefficient is meaningless.

In summary: The average return and the Alpha coefficient both represent returns, with higher values being better. Standard deviation and Beta coefficient represent volatility, also known as short-term risk; the lower the value, the better. The Sharpe ratio is a combination of returns and risk; the higher the ratio, the better, when returns and risks are comparable.

When comparing within the same category, it is essentially a comparison within the same type of asset portfolio.

Net Asset Value (NAV) Phobia:

The "prices" of different funds can vary significantly. The buying and selling price of an open-end fund is its NAV. New funds are purchased at the issue price, which is typically 1 unit for 1 yuan. Questions arise: 1. Which fund to buy? 2. How much is appropriate to buy? 3. Is there still room for the price to rise? 4. How low can it fall during a decline? 5. If more units are purchased now, will the dividends be higher in the future? 6. If this is the case, does a higher fund NAV mean greater risk?

For example, consider two open-end funds with the same investment strategy and portfolio, the same stocks in the portfolio, the same fund manager, and essentially the same fund size. The only and crucial difference is the NAV: Fund A has a NAV of 1.5 yuan; Fund B has a current value of 1.1 yuan. If you use the same 10,000 yuan to purchase both funds, you will get a different number of units. After holding for 1 year, if the stocks held by Fund A increase by 10%, the NAV rises to 1.65 yuan; Fund B's stocks also increase by 10%, and the NAV rises to 1.21 yuan. Calculate the returns. Total assets = number of held shares * unit NAV. Therefore, returns are only related to your total investment and the rate of change of the unit fund, and are independent of the NAV level.

The fund NAV is obtained by dividing the total assets by the total number of fund shares. Total assets can grow either by an increase in fund shares or by an increase in the unit share price (NAV). For instance, without considering changes in the total asset amount and without considering subscription and redemption fees, the returns of a fund are determined by the level of the unit NAV. If two funds were established at the same time and are stock funds, held for 1 year, with one having a NAV of 1.1 yuan and the other 1.5 yuan, then one earning 10% in a year and the other 50%, which one would you choose, or which one is worth your investment?

There is no ceiling for NAV growth, just as there is no ceiling for stock prices.Value funds refer to funds that invest in value stocks; funds that invest in growth stocks are called growth funds.

What are value stocks? What are growth stocks? To illustrate the investment in stocks using the analogy of real estate investment, consider a person who owns three houses, typically keeping one for investment and sale. There are generally two scenarios for such houses. The first scenario involves a house that is ordinary, located in a mediocre area, and has low-end renovations. However, compared to houses of the same size and in the same region, its price is lower because the owner needs funds for a housing upgrade and ends up selling at a discount; a house originally worth 400,000 is sold for only 300,000, which presents investment value.

The second scenario involves a house that is not discounted, newly built, in a prime location, and luxuriously decorated, with significant potential for appreciation. The selling price for such a house is 800,000, but it is expected to rise further, which also presents investment value. If we replace the two types of houses with stocks, the first type is known as value stocks, and the second is the so-called growth stocks. Correspondingly, investing in the first type of stock is value investing, and investing in the second type is growth investing. Value investing, in essence, is about choosing to buy at a low cost. Its founding father is Benjamin Graham, the teacher of Warren Buffett, while the growth investing theory originated with Philip Fisher. Buffett has stated that his own investment approach is "85% Graham and 15% Fisher," meaning he is a combination of value and growth investing, with the investment proportion being greater in value than in growth. Ultimately, whether it can bring returns is the core of investment. There are 10 key factors to judge value and growth.

Therefore, the risk of fund investment also comes from the risk of the individual stocks it holds. The more stocks, the greater the risk, as stock price fluctuations are generally large in the short term, but this has no relation to the absolute value of the fund's net asset value. The level of the fund's net asset value has no relation to risk or return. Therefore, when purchasing a fund, there is no need to consider the fund's net asset value. Instead, it is often better to consider the type of fund and its operation.

Is it necessary to rush to buy new funds? How much do you know? What benefits and discounts do they bring, and is it really necessary to rush to buy them? The answer is no.

Characteristics of new funds: Before the sale, a prospectus is prepared, and a fund manager is designated. There is also an issue scale, with subscription fees of 1 yuan per share, typically at 1.2%, and purchase fees at 1.5%. For subscription settlement, a "closed period" of three months is generally set, also known as the fund's construction period. This is the process where the fund company and the fund manager start to gradually invest in the capital market according to the investment strategy and fund filing conditions specified in the fund prospectus, also known as the "construction" or "building" process, which is about establishing the fund's stock "warehouse."