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Eight tips on how to choose a fund

While finding the right investment for your portfolio can be frustrating and complex, funds offer a simpler shortcut to diversification. Here are some helpful tips and shortcuts to help you choose an investment fund.

| 9 min read

Some investors are highly active and enjoy researching and choosing their own individual shares, bonds and other investments. However, this ‘hands-on’ approach can have disadvantages. For instance, it can be a challenge to devote enough time to keep on top of company news and fully monitor this kind of portfolio.

This is where investment funds such as unit trusts and investment trusts can offer a convenient solution.

What is a fund?

Funds allow you to spread your investment – and risk – across dozens of different companies. This is different to shares where you invest in an individual company. Funds are either managed by a professional fund manager or are designed to simply track the performance of a market, also known as an index.

For instance, an equity fund manager typically selects a range of shares, usually 50 to 100, which means less reliance on the performance of any one company. The same applies to other asset types such as bonds; each comes with a level of risk that can be partially mitigated through diversification – not having all your eggs in one basket.

Yet with thousands of funds available, where do you start when trying to pick one? Here are some helpful resources and things to consider.

How to choose an investment fund

1. Decide on how you approach risk

Choosing any investment involves striking the right balance between risk and potential reward. Typically, if the level of risk taken is low, the return should also be expected to be low, whereas if the level of risk is higher there is greater potential to make a better return over time – but you could also lose more money, especially in the shorter term. There is no point taking too much risk and losing sleep at night!

Yet what is high risk in the short term is less so in the long term. The longer the timescale, the longer investments have for market fluctuations to even out and, potentially, the more risk can be taken. This is why many people turn to higher risk investments to help to potentially grow their capital in order to meet longer term objectives such as retirement. However, if the investment falls in price, investors need the ability, and the nerve, to stay invested to give themselves the chance to recover rather than lock in any losses.

The alternative, leaving lots of money in cash is the opposite: low risk in the short term but potentially risky in the long term. Inflation tends to erode the spending power of cash leading to slow motion wealth destruction.

2. Learn about asset classes

Asset classes are the types of investments you hold, grouped together by similar qualities. The main types of asset are:

  • Equities (shares)
  • Fixed interest securities (bonds)
  • Property
  • Cash

Each asset class has different characteristics but, unlike cash, they can fall as well as rise in value, so when you buy funds investing in these you may not get back what you originally invested.

History shows that over the long term the stock market (representing shares in individual companies) is typically the most volatile of these asset classes but has also provided the best overall returns; but mixing shares with other asset classes may lower short term volatility while still providing reasonable returns.

3. Decide how ‘hands’ on you want to be

Building a balanced portfolio of funds across asset classes and geographies that provide decent returns while remaining resilient in a variety of economic scenarios is not easy. Fortunately, there’s a short cut to diversification across a range of areas and asset classes.

If you aren’t confident in making investment decisions, ‘multi-asset’ funds could be a convenient solution. They could also be a ‘core’ holding for more experienced investors, around which other holdings can be added. For instance, Charles Stanley’s Multi Asset Funds provide diversified portfolios in one easy-to-buy investment, managed and monitored by our experts.

4. Think carefully about your objectives

Why and how you want to invest will help shape what you invest in. Is it for you or a child, and for what purpose is it – retirement or nearer term? Do you wish to invest as a lump sum, or will you invest in a series of lump sums or monthly contributions? These factors will dictate the amount of risk you wish to take and the types of fund you use.

Risk is usually connected to how long you want to in-vest for and how much you can afford to contribute. Maximising exposure to the most rewarding (but in the short term most risky) areas should be for longer investing periods. For shorter time periods (e.g. 5-10 years), you should typically use more lower risk areas, such as bonds.

Also consider whether you wish to take into account any ethical or other non-financial views For many people investing is about more than making money and it’s now easier than ever to build a portfolio that is aligned with your principles. There is more information on our Responsible Investing page.

5. Decide whether you want income or growth (or both)

Your broad objective surrounding whether you are investing for income or growth is going to influence what you select too.

Some funds are designed to provide a steady income, which can be particularly useful for those in retirement. Others simply aim to maximise overall returns in terms of both income and growth, which can be best for investors trying to maximise returns for the level of risk taken. You can buy ‘income’ units, which distribute income, and ‘accumulation’ units, which roll any up for you, accordingly.

The ‘yield’ of a fund can tell you roughly how much income you can expect to receive annually but beware this figure is often based on historic data and it varies all the time. Never buy a fund just because it has a high yield – it can be a sign of a high level of risk.

6. Think about which assets sectors do you want to consider

If you already have some ideas on where to invest but need some help choosing individual funds then our Direct Investment Service Preferred List can help. Our Research Team has created the list to highlight what we consider to be good-quality products in each of the major areas for new investment. It covers ‘active’ funds where we have conviction that the manager is likely to outperform over the long term, as well as some passive fund or ‘trackers’.

7. Take a look at our Preferred List

Lots of investors focus mainly on how well an investment or fund has performed in the past. While this is informative to a degree, past performance is not a guide to what might happen in the future. You should understand how it is managed, why it has performed the way it has and what conditions it will likely perform best in going forward.

The fund’s factsheet will tell you a lot about its features and current construction, and you should always look at the fund’s Key Investor Information Document to learn about the particular risks it carries. Both these documents are found on the ‘Key Features and Documents’ tab of the fund’s page.

At Charles Stanley our approach to fund research is very much qualitative as well as quantitative, and there is more on how we select funds for the Direct Investment Service Preferred List.

8. It’s not just about past performance

Lots of investors focus mainly on how well an investment or fund has performed in the past. While this is informative to a degree, past performance is not a guide to what might happen in the future. You should understand how it is managed, why it has performed the way it has and what conditions it will likely perform best in going forward.

The fund’s factsheet will tell you a lot about its features and current construction, and you should always look at the fund’s Key Investor Information Document to learn about the general level of risk that a fund carries and the individual risks associated with it. On our website both these documents are found on the ‘Key Features and Documents’ tab of the fund’s dedicated page.

Is your portfolio working hard enough for you?

If you are unsure of the level of risk you should be taking or which types of investments to consider, a consultation with a professional can help provide fresh insights going forward.

Find out more

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Eight tips on how to choose a fund

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Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.

The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.