How do you choose a fund to invest in?

Right Choice Selected by an Young male Professional as against another Wrong Choice by clicking the button

Knowing you want to invest in a fund is a brilliant first step. They can be exceptionally good ways to invest in stocks and shares, bonds, commercial property, or a huge mix of assets. They spread your risk, they do the hard work, and they make the expert decisions for you. They can also be a great place to invest your ISA allowance. All you have to do is decide which investment fund you want to put your cash in.

It's easy to get sucked into investing in a fund in the worst way possible. We hear about a fund that has done really well recently, and we decide we want a piece of the action. Unfortunately, this risks you not understanding where your money is going, picking something that doesn't suit you, and buying into it just as the market turns.

Instead you need to start with what you want. Think how much you want your money to grow, and how you want to balance that with the level of risk you are prepared to take.

From here you have three options. The first is the DIY one - which will be the cheapest and leaves the most control in your hands - but gives you the responsibility of making the decisions.

1. DIY

The idea is to match your risk tolerance and growth ambitions to the mix of asset classes you are interested in (such as shares and bonds). There are no hard and fast rules but the experts recommend getting a mix so your risk is spread across these assets. Typically bonds grow less but pose less risk, and equities have the potential to grow faster but offer more risk - although there will be times when any asset class will confound expectations.

Once you know the mix of assets you want, you must choose the types of each asset class you need. So, for example, do you want large UK blue chip stocks or 'equity income' stocks that tend to grow relatively slowly and deliver reliable dividends? Do you want smaller companies that have the potential to grow more but to be more volatile and fall more in difficult markets, or do you want to look elsewhere in the world, such as the volatile Far East or Emerging Markets - which typically offer much more risk, but in some periods have delivered more growth.

You also need to think about the type of approach the fund manager takes. They may invest in lots of stocks and spread the risk, or have a handful that they really believe in (which tends to be riskier but offer more potential for growth if things go well). What kind of approach suits your needs?

Picking a fund

Once you know the kind of assets you are interested in, the 'sector' (including the country or the size of the company), and the kind of management style you are after, you need to narrow yourself down to the specific funds.

There are an enormous number, so it's sometimes worth starting with the lists of recommended funds that various organisations put together, such as the Citywire Money Selection, or the Hargreaves Lansdown Wealth 150. In each you will find a handful of funds in your chosen sector. It's worth getting the fact sheets for each, and reading about the aims and objectives of the fund, before deciding which of them suits you best.

Of course, you shouldn't ignore performance entirely. A fund that has done worse than everything else in the sector for the best part of a decade may not, for example, be the wisest place to put your money. It's worth looking at things like how many years for the past ten it has outperformed the sector.

2. A multi-asset fund

If you want to reduce the number of decisions you have to make, you can opt for a multi-asset fund. This still means working out the overall approach you want and the balance of risk and reward. However, instead of devising your own mix of assets and picking a fund for each, you pick a multi-asset fund that takes the kind of approach you want. It won't be able to guarantee the performance you are after, but you will have an expert making the individual asset decisions - instead of having to make them all yourself.

3. Get help from an expert

If all of this sounds like too much, then you can get financial advice. This will cost you, but you may decide that it's worth it. An adviser will talk to you about the kind of risk you are happy with, and the returns you would ideally like. They will then help you find a balance, and match that to the funds they recommend. Good fund managers will also keep an eye on performance, and stay up-to-date with your needs, so they can make any changes required to ensure your investments still meet your requirements as time goes on.

FT's Predictions for 2016

3 PHOTOS
The world's most successful investors
See Gallery
How do you choose a fund to invest in?

Soros is one of the world’s most famous speculators - who sees the market as something to place highly leveraged bets on rather than invest in.

He cemented his reputation by shorting the pound on Black Wednesday in 1992, and making $1 billion from the collapse of the British currency and the near-collapse of the Bank of England.

He is another noted philanthropist, giving primarily to human rights, public health and education charities.

Slater was another highly controversial investor, known for corporate raids on public companies, and subsequent asset stripping to realise quick value for shareholders.

He also invented the phrase ‘The Zulu Principle’ to describe the importance of being a specialist when you are investing, so you can concentrate your research efforts and know more than the rest of the market about something specific.

Woodford (CBE) gained his reputation at the helm of the Invesco Perpetual Income and High Income funds, by offering relative stability and reliability in even the toughest markets.

His trademark was to make bold decisions about the companies he wanted to be invested in, and then stick with them - no matter how unfashionable his decisions were.

It led him to buy tobacco stocks in the 1990s (because he felt that concerns about the legal threats to the firms were overplayed) and avoid technology in the dotcom bubble.

Woodford currently runs Woodford Investment Management.

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE
Read Full Story

FROM OUR PARTNERS