Seven tips on how to choose a fund

With thousands of funds available, finding the right investment for you can be complex. Here’s some helpful tips and shortcuts.

| 7 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 has 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 collective funds such as unit trusts and investment trusts can offer a convenient solution. These spread your investment – and risk – across dozens of different companies and are either managed by a professional fund manager or are designed to simply track 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.

1. Learn about the different types of funds

There are lots of different types of funds, both in terms of their structure and what they invest in. The differences between unit trusts / OEICs, investment trusts and exchange traded funds (ETFs) are important. Before you start choosing your own funds take some time to learn about the features of the various products.

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

Building a balanced portfolio of funds 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.

3. 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 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 Socially Responsible Investing page.

4. 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.

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.

If you want to take income via payments to your bank account make sure you select 'inc' rather than 'acc' units for a Unit Trust or OEIC.

5. Think about which assets and sectors you want to consider

The main types of asset - equities, fixed interest securities, property and cash - each have different characteristics, but unlike cash all suffer from price volatility to a greater or lesser extent. History shows that over the long term the stock market (representing shares in individual companies) is the most volatile asset class but has also provided the best returns.

Unit Trusts and OEICS are categorised by the Investment Association into around 30 different sectors, which defines the areas in which they can invest. This means investors can easily identify funds that might meet their needs and compare them with each other. Blending funds from different sectors can provide a balanced portfolio and can reduce risk while still aiming to generate decent returns – there are some simple examples as to how this might be done in our Starter Portfolios.

6. Take a look at our Direct Investment Service Preferred List

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. 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 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.

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.

Seven 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.

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