How to choose a fund

Choosing an investment fund can be a tough decision, but getting it right (or wrong) can have a huge impact on your money.

With more than 3,000 funds available in the United Kingdom, it can also be a daunting task. Trying to get started by simply browsing a long list of names is not the easiest way to do it!

We’ve put together a series of questions that will help you find a fund that’s right for you, whether you’re investing for the first time or making some changes to your portfolio.

Read more: What is an investment fund?

What are your savings goals?

The first thing to think about is what you personally want to achieve. Meaning, what do you eventually want to use your money for?

For example, you might be saving to buy a home, pay for your children’s education, take a year off to travel or plan for retirement. Or you might just be putting money aside for a rainy day.

Whichever way, being clear on why you are investing can make a surprisingly big difference to your success. It will motivate you to keep saving and help you decide how much risk you’re willing to take (or not) with that money.

What is your time frame?

Once you’ve got your goal sorted, the next logical question is by when do you want to have achieved it? Do you need the money in the next couple of years or are you investing for something that’s 20 years in the future?

Generally, the longer your time frame, the more risk you can afford to take as you have time to recover from some periods of loss and hopefully still come out ahead.

For example, if you’re 30 and saving to retire at 60, you may want to consider higher risk/higher potential return investments.

But if you need the money to renovate your house next year, you probably don’t want to risk losing it by putting it in a highly volatile investment that may go up and down in value quite significantly over the short term.

How much risk are you comfortable taking?

It’s a cliché, but a true one – if you’re lying awake in bed at night worrying about whether you’re losing money, you’ve taken on too much risk for your comfort levels.

Watching the value of your investments move up and, more particularly, down in a volatile market is not an easy thing to do and it can lead you to make panicky decisions that cost you quite a bit of money.

It’s a good idea to decide at the outset how much risk you want to take so you don’t find yourself in over your head down the track.

Risk is very personal and what one investor considers ‘high risk’ may be ‘medium risk’ to another. A good question to ask yourself is how much can I afford to lose in the short-term?.

Read more: Understanding the different types of risk

How can you tell how risky a fund is?

Different funds will have different levels of risk.

For example, a fund that invests in stocks listed in emerging market countries such as Brazil or India will be deemed higher risk than a fund that invests in bonds issued by the UK or US government.

Within each sector (e.g. emerging markets, bonds etc), some funds will also be more or less risky than others.

FundCalibre’s research team provides a risk rating for each Elite Rated fund. The FundCalibre risk rating is our proprietary rating to give you some guidance on the relative risk of each fund.

One is the lowest risk and 10 is the highest risk. However even funds rated one are subject to some risk.

Which asset class should you invest in?

Investments are divided into different ‘asset classes’, which typically carry different levels of risk and different potential returns. Through managed funds, you can invest in a single asset class or a combination of asset classes.

The main asset classes are:

• Cash
• Bonds (also referred to as fixed income or fixed interest)
• Shares (also referred to as stocks or equities)
• Property
• Commodities (such as oil or gold)

Read more: Tips for constructing a balanced portfolio

Keeping your money in a bank account (cash) is considered the least risky option, as your chances of losing that money are minimal. On the other hand, you won’t won’t make much money and its value may decline in real terms due to the effect of inflation over time.

Bonds are considered the next least risky asset, although again, their potential returns are generally lower than other assets.

Shares and property have historically delivered the best returns over time, but it’s very important to understand you can also lose money by investing in these assets.

If you’re creating a long-term portfolio, you would ideally invest across a couple of different asset classes—some lower risk and some higher risk—to maximise your potential returns while still protecting a part of your savings.

Be realistic about what you want to achieve versus your risk appetite – you’re not going to get there overnight!

And finally! How do you pick a fund?

The idea of going through these questions is to help you feel more confident to make decisions that suit your needs, as opposed to simply following a stock tip someone gives you at the pub on a Friday night!

Start researching Elite Rated funds

Here are our top four tips for comparing different funds:

• Don’t just look at past performance. Yes, a long-term track record of strong returns can be a good sign, but there is never any guarantee a fund will continue to do well in the future. It may be a fund that performs particularly well in one type of market, but not others. Or, the fund manager may have recently changed.
• Research the fund manager. How long have they been running the fund? Do they have experience managing money in different market conditions? What support or resources (e.g. in-house research teams) does the manager have?
• Never invest in something you don’t fully understand. Take time to do your own research and make sure you know exactly what the fund is investing in and how it delivers returns to its investors.
• Check the costs and the returns after costs. The cost of a fund can impact on its total returns so it’s an important consideration. However, never choose a fund purely because it has the lowest charges. Returns after costs are arguably much more important. It’s better to pay a little more for a fund that should perform better over the long term, rather than pay less, but for a fund that under-performs.