How to pick an investment fund

We look at the top things to consider when picking which fund to invest in.

Returns on savings accounts are still pretty pitiful, so it can be very tempting to consider other areas where you may be able to make a better return on your money.

One such area is investment. Perhaps the simplest way to get a taste of investing is by doing so through a fund – rather than you having to pick out the individual stocks and shares to invest in, you put your money into a fund which is already invested into various areas of the market.

However, funds come in all different shapes and sizes, and can offer markedly different things. So how do you go about picking a decent one?

Risk

A good starting place is working out your own attitude to risk.

Are you happy to dip your toes into more volatile waters, in order to potentially make more significant profits? Or do you want a more conservative approach, with less chance of losing cash but equally less chance of monumental gains? And don’t allow the name of the fund to dupe you when it comes to its risk profile - just because it calls itself a cautious fund, that doesn't mean it actually is one, as we explain in 'Cautious' investments can be very risky.

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Your attitude to risk will play a big part in the sectors and asset classes you are likely to want to invest in.

Superstar fund managers

When investing into a managed fund, the person who will be doing the managing should be a factor in your decision. You’ll want to have faith in this person’s judgement, and feel that their investing strategy tallies up with what you’re looking for from your investment.

For some, this means sticking with the superstars, the big names of the investment world, people like Neil Woodford or Anthony Bolton.

These fund managers tend to have a long track record of having beaten the market, and so are an attractive place to start. However, you’ll need to consider whether the fund manager is likely to stay at the firm, and in charge of your money, for as long as you’re invested.

After all, if you plump for Fund A because of the manager, and a year later he is poached by a rival, how do you know that the replacement manager will be up to scratch?

Measuring performance

The performance of a fund will also play a role.

When researching funds, its previous performance will be trumpeted by the provider. And while this can make interesting reading, it’s debatable just how useful it really is. After all, the fact a fund had a successful 2010 has very little bearing on how well it is likely to do in 2011. Indeed, the fact that a sector did well last year may actually mean that you’ve missed the boat, and so investing now is a bad idea.

That doesn’t mean you should ignore this information entirely, though. Instead, take a longer-term look. How well has the fund performed against your index over the past ten years? Any fund can have a good year, but if it’s consistently outperformed, you may have found a keeper. Again, look at how often the manager of the fund has changed. The best performing funds often have the same person at the helm for a long time.

You’ll also need to consider exactly how you are measuring the performance of a fund. Generally the providers will use a benchmark index that they have selected to show how well the manager has done. However, this can muddy the matter further. You should pick your own benchmark to measure the performance of the fund – and the fund manager – against.

Costs

Investing in a fund brings with it a range of charges, the size of which vary from fund to fund. There is the annual management charge, which despite the name does not actually cover the cost of managing the fund for the year. On top of it, you also will end up shelling out on all sorts of other fees, from legal fees to expenses.

The Total Expense Ratio will give you a better idea of how much you will actually have to shell out for the fund, though it won’t be advertised that clearly. Make sure you know what you’ll be paying before you go ahead and invest.

Cutting out managers

There are some excellent fund managers out there, and there are some lucky ones who blag the odd decent year. However, generally managed funds underperform the market. There are all sorts of reasons for this – perhaps the manager had a good year previously, and so is stubbornly refusing to move out of the markets that have served him well. Or perhaps he’s having a shocker, and fancies a few speculative punts to try to hit his targets.

Of course, you can cut the human error out completely by investing at least some of your money into an index tracker. These will attempt to replicate a specified index, say the FTSE100. These trackers will never outperform the market. However, they will outperform the majority of funds.

For more on why trackers are a good bet for many of us, check out Six great reasons to choose an index tracker.

These are just some measures you can use to evaluate whether to invest in a particular fund. If you have tips of your own, why not share them via the comment box below?

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