How to pick a fund and prosper

Yesterday was ‘Little Year’ in the Chinese calendar. Falling a week before the start of the New Year, the day is traditionally one of memorial and prayer, but it’s also a day to clean out your house and ‘sweep away’ bad luck.

While you’re cleaning house, don’t forget to tidy up your finances because, according to Chinese astrology, the coming ‘Year of the Pig’ could be a prosperous one.

But when it comes to choosing an investment, where to start? Like that drawer in the kitchen – so full of all sorts of things that it will barely close – picking a fund from the 3,000 plus available can seem such a daunting task that it’s better not to even start.

So this week we’re taking the time to go back to the beginning and explain how to choose a fund.

‘You have to do the research. If you don’t know about something, then you ask the right people who do.’ – Spike Lee, Director

Start with a clear understanding of why you’re investing

What do you eventually want to use the money for? For example, are you saving to buy a home, take a year off to travel or planning for retirement? Start compiling a mental (or even physical)| vision board for your investments to motivate you to keep saving.

So now you have your vision board full of tropical holidays, early retirement and a big ‘ole house in the country – ask yourself what’s your time frame? Are you investing for something that’s 20 years in the future or will you need the money in the next few years?

Determine your appetite for risk

Now that you’ve determined your why and when, it’s important to think about how much risk you’re willing to take with your money. 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. However, if it’s causing you to lose sleep – it’s not worth it.

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

Do your research

Time to start thinking about where and with whom you want to invest.

Here are our top four tips for comparing different funds:

  1. 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.
  2. 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?
  3. 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.
  4. 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.

The research provided on FundCalibre can be a good starting point, and less overwhelming than staring down a list of 3,000 possible funds.

But if you still find yourself lost in a see of funds and jargon, follow Spike Lee’s advice and get additional help by reaching out to a financial adviser. It’s better to be over prepared than under when choosing an investment fund: getting it right (or wrong) can have a huge impact on your money.

Read more: Tips for constructing a balanced portfolio

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.