How to pick an investment fund

You have already decided to open a Stocks and Shares Individual Savings Account – but the next question is, what investments will you embrace?

For investors it’s the ultimate in crystal ball gazing. Choose wisely and you can look forward to enjoying bumper returns.

But pick the wrong portfolio and the value of your holdings could fall sharply. It’s a difficult balance to strike but here are our tips for improving your chance of success.

Step one: Decide your investment goals

Your personal financial goals will influence the type of funds you want in your overall portfolio. While some funds focus on steady gains, others embrace more risk in the pursuit of higher returns.

Therefore, you need to ask yourself some questions. For example, do you need to reach a figure within a set timeframe or are you looking to gradually build up a nest egg over the next 30 years?

How much do you need to generate? Have you got any money in other investments? Will you be relying on your ISA holdings to meet your future financial needs?

Step two: Consider your attitude to risk

The next stage is linked to the first step. What impact would losing everything you’ve invested have on your life? If it would be totally devastating, then this will affect the risk you can take.

Similarly, are you relaxed about stock market volatility and seeing the value of your portfolio rise and fall over time or are you constantly checking for share price movements?

If you sit more in the anxious camp – or wouldn’t be able to endure even short-term losses – then you may be better off focusing on safer, less risky investments for your portfolio.

Step three: Consider diversification

It can make enormous sense to spread your risk on a variety of investments. For example, pinning all your hopes on one asset class can be potentially disastrous.

Diversification can be achieved by combining equities, fixed interest, property and other investments. The weighting of each will be determined by your personal circumstances.

The ideal scenario is having exposure to a variety of assets that don’t usually rise and fall at the same time or by the same amount. However, bear in mind that some extreme market conditions can affect everything.

Step four: Decide on your asset allocation

Are you wanting most of your money invested in household name UK companies that have a reputation for being stable and reliable?

Would you prefer to have some exposure to racier emerging market equities that can potentially surprise on the upside and achieve inflation-busting returns?

Maybe you’d prefer to have a stable core of safer investment funds and add a few more exciting, albeit unpredictable, satellite options around the edge.

Step five: Research funds

There will be hundreds of possible funds covering the areas in which you want exposure, so take your time to research them.

Examine their stated aims and objectives to gauge whether this meets your objectives. Are you happy with the risks being taken? Do you agree with their overall outlook on the market?

Each of FundCalibre’s Elite Rated and Radar funds has an individual fund note, explaining what they do and how they do it.

Research Elite Rated funds here

Read the opinions of experts – such as our fund research analysis – and then use them to make up your own mind.

Step six: Be wary of past performance

It’s easy to assume that past performance tables are a great indicator of whether a fund is worth considering, but this is definitely not the case.

The fact is, there could be reasons why they have done so well. For example, they could have benefitted from a general enthusiasm for the assets they invest in.

This means the fund would have delivered returns virtually irrespective of how well the manager at the helm has been running the portfolio.

For example, a technology fund may have delivered bumper double digit returns on the back of growth stocks being in favour.

You also need to be wary of piling into stocks and funds that have performed strongly because you risk entering after gains have already been made.
Similarly, just because a fund hasn’t made money doesn’t necessarily mean it’s to be avoided. It could be totally down to external factors. This is where nothing beats proper research.

All of FundCalibre’s Elite Rated funds have passed our AlphaQuest test. This means that we have stripped out the market movements to show exactly what value a fund manager has added, and we have run the numbers to see how likely it is that that manager will add value again.

Step seven: Look at the manager’s track record

A great place to start is the fund manager’s track record. Seeing how they have performed in different market conditions can provide a fantastic insight into their abilities.

For example, do they struggle during economic downturns? Have there been periods in which they often outperform their rivals? Are there other reasons for negative returns?

It’s particularly important to look at how they have done at the helm of different portfolios or fund management groups. Some managers have track records going back decades.

Step eight: Regular monitoring

Review your portfolio regularly. Ideally, take a detailed look at your investments at least once or twice every year to ensure you’re on target to achieve your goals.

This will also help you avoid becoming emotionally attached to holdings. When it comes to investing, your decisions need to be cold and detached.

Revisiting also enables you to rebalance your overall portfolio. This ensures you won’t run the risk of taking on too much – or too little – risk. Both can affect your investment goals.

Step nine: Ring the changes

Don’t be afraid to overhaul your ISA portfolio if it no longer meets your needs. We are living in constantly changing times and our requirements will differ the older we get. As we near retirement age, we often start to ‘derisk’ our portfolios to make sure we won’t suffer heavy losses.

And, just because an investment fund hasn’t performed as expected, doesn’t always mean it should be axed. You first need to find out exactly what’s happened. There may be global or sector issues. Has a fund beaten or lagged its peer group? Is it invested in an area of the stock market that’s been out of favour but is likely to recover?

Likewise, if a fund has done very well, it may account for a larger part of your portfolio than you are comfortable with and trimming your holding may be a good idea.