How to choose investment funds

If you’re new to investing or after an easy and convenient way to invest your money then you might want to consider funds.

Putting your money into investment funds helps to spread the risk and they are popular with both beginners and more experienced investors. But the choice can seem overwhelming, with more than 3,000 to choose from in the UK.

In this article we cover:

• Investment fund ideas
• What to consider before investing in a fund
• Where should a beginner invest their money?
• How to pick a ready-made investment portfolio

*This article contains affiliate links that can earn us revenue.

How do I decide which fund to invest in?

A good first step is to check out best-buy lists. These are shortlists published by investment platforms to help narrow down the choice.

They usually feature funds chosen by in-house analysts who look for investments that offer strong management, strong performance and good value when it comes to fees.

• Hargreaves Lansdown* produces the Wealth Shortlist
• AJ Bell* has Favourite Funds
• Interactive Investor produces the Super 60
• Tillit’s* selection is chosen by its Investment Committee

There is no guarantee the funds on these shortlists will perform better than those that are not. But at the very least, having a look can help give you investment ideas. 

The Bank of England has warned that an economic downturn is on its way in the coming months following rapidly increasing levels of inflation. See our tips for investing during a recession.

Find a match for your needs

Each fund must explain its objectives. This can help you decide if the fund matches your own investment goals.

• Income fund manager – buys and sells stock market-listed companies that have strong balance sheets and pay regular dividends.
• Growth fund manager – typically chooses to invest in companies judged well placed to grow their earnings significantly over time. Growth funds focus on firms that reinvest their profits in their business, rather than paying them to shareholders as dividends.
• Value fund manager – looks for unloved, cheap stocks in the hope that the company’s worth is realised over time. The manager hopes the share price of these firms will increase so they can sell at a profit.

You can find the objectives on the “fund factsheet” provided by the investment company behind the fund. They are updated every month and accessible online.

A growing number of funds are also prioritising ethics over profits (though they should make your money too).

You can get a factsheet through your investment platform, directly from the fund management company, or from Trustnet.com.

Read more: What kind of investment strategy could a new investor consider?

Level of risk

Consider the level of risk you want to take. However bear in mind the lower the risk, the lower the returns you would expect to make.

You should be able to get an idea of the risk profile of a fund based on:

• Asset class: If you are happy to take on a relatively high level of risk, you might want to buy a fund that is purely invested in shares. If you want to tone down the risk, you might want to buy a fund invested in a mix of different asset classes, such as bonds.
• Size of companies: Funds that invest in large companies that are already successful are usually seen as lower risk than funds investing in small, upcoming companies that are more likely to fail.
• Region: Some funds invest purely in companies based in developing countries (called emerging market funds). Investing in these regions would usually be deemed as higher risk because their economies tend to be more fragile.

Remember: avoid investing in something that you don’t fully understand. 

Look at how the manager invests

When picking funds, it’s important to know what they invest in. The top 10 holdings and the percentage of the fund’s value held in each company – or bond – is displayed on the fund factsheet. 

But a fund typically holds anything between 50 and 100 stocks. Getting hold of a full, up-to-date list of holdings is not quite as easy, because fund companies are only required to publish a full list twice a year.

However, some managers publish more frequently. Fidelity* and JP Morgan Asset Management are among those that allow access all year round – you just need to ask. 

The rules are slightly different for investment trusts. These must disclose their top 10 plus any holding accounting for 5% or more of the portfolio value, as well as any unquoted investments.

Should I invest all my money in one investment fund?

It’s important to consider having a balanced mix of funds in your portfolio. If you’re looking to spread your risk, there may not be a point in buying ones that invest in similar sectors or geographical areas otherwise you’re just getting lots of the same thing.

Aim to have a good spread of asset classes, sectors and regions.

Many investors:

• Build a core portfolio of low-cost passive funds, which mimic the performance of stock market indices
• Add the skills of actively managed funds, which aim to pick stocks that they believe will outperform the market

There is no one-size-fits-all answer to how many funds you should hold in your portfolio. As a rule, you should consider only keeping as many as you are comfortable monitoring.

If you’re not sure where to start, read our Beginner’s guide to investing.

How do I decide which fund to invest in?

1. Think about risk

• Different funds have different levels of risk
  • Decide at the outset how much risk you want to take
  • Emerging market equities, for example, are typically more attractive to investors prepared to take a chance in their pursuit of higher returns
  • Most funds give some indication of a risk level

2. Check independent fund ratings

• Thousands of funds are given a rating by independent firms
  • It helps consumers spot those offering the best potential for return
  • Highlighted for superior performance in terms of stock picking, consistent returns and risk control 

The companies that provide ratings are:

1. Morningstar – awards gold, silver or bronze badges to managers it believes can outperform in the future and also gives between one and five stars for past performance.
2. FE FundInfo – provides crown ratings based on performance.
3. Square Mile – takes into account environmental, social and governance (ESG) factors when rating funds

NOTE: The investment platforms Fidelity, AJ Bell, Interactive Investor and Halifax have search options for ratings provided by Morningstar. Barclays Smart Investor uses FE Crown Fund Ratings. The platform EQi (previously Equiniti) uses ratings from Square Mile.

3. Pay attention to charges

• Investing isn’t free
  • Fees will be deducted every year for the running of your funds
  • You will also pay the platform responsible for holding the fund
  • They each have different charging structures
  • Ongoing charges figure (OCF) is the most accurate measure available of what it costs to invest in a fund
  • OCF is made up of the annual management charge (AMC) levied by fund managers and other operating costs

Find out more here about the impact of fees on investment returns.

4. Don’t only pay attention to fees

• Fees will eat into returns, but don’t be guided purely by price
  • Choosing a fund because it has the lowest charges could be a false economy as returns after costs are important
  • It could be 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 underperforms

5. Look at the performance figures

• A fund’s track record (the returns achieved in previous years) shouldn’t be a guide to invest but it can be an important gauge of whether a manager has delivered or not
• There are a number of ways to check:
  • Fund factsheets – consistent poor performance when compared against returns by a fund’s peers should ring alarm bells
  • “Value assessment” reports published by fund providers – highlight funds offering poor value and are available on the individual websites of each company
  • Reviews – of funds you’re interested in to check it’s not been flagged
  • Trustnet and Morningstar websites to see how a fund has performed compared to its sector

6. Dig deeper

• Read the funds monthly and quarterly updates
  • These explain how your money is being invested and take a look at the wider economy
  • Updates tend to be published on the investment company’s website – your platform might provide links

What should a beginner invest in?

If you are new to investing, buying a cheap tracker fund might be a good starting point. These usually have fees of around 0.10%.

Trackers and exchange traded funds can be cheap and track the performance of a stock market. For example, a FTSE 100 tracker fund will mimic the ups and downs of share prices of the biggest British companies in the index. These are sometimes called index funds.

But you should be prepared to leave you money invested for the long term to ride out any downturns.

What is the best way to invest £10,000?

Before investing your £10,000 in a fund, you should consider opening a tax efficient product like a stocks and shares ISA or a pension. These products will protect your savings from capital gains tax and dividend tax.

We give our tips here on how to invest £10,000.

How to choose investment funds

As a summary, here’s a checklist to consider:

• Look at best buy tables to filter the funds you might want to buy
• Review past performance (NOTE: this doesn’t guarantee future success)
• Understand the investment strategy
• Check independent ratings
• Avoid buying too many funds that have similar objectives
• Compare the fund’s charges and fees to make sure you are getting good value for money
• Check you are spreading your risk across different companies based in different regions

Don’t want to pick the investment funds yourself?

If wading through the different types of investment available is too much like hard work, there is another option for investors – the ready-made portfolio, where platforms package up a diversified selection of funds chosen according to the level of risk.

We have reviewed ready-made portfolios in our independent ratings, looking closely at the fees and highlighting the pros and cons of each service.

You can have a ready-made portfolio within a stocks & shares ISA, personal pension or investment account. Top-scoring services include those from evestor and Vanguard. 

Check out our guide to the best stocks and shares ISAs here.

While we review investment accounts, pensions and ISAs, individual funds are not reviewed. 

Alternatively, you can seek financial advice and get a professional to make investment decisions on your behalf, although you will have to pay for this.

Kellands* is offering all of our readers a free hour-long session* with one of its independent financial advisers. They can get a good idea of your financial goals, and help you take the first step to achieving them.

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