How to choose a managed fund

If you want to try and beat the market, find out how to choose the best managed funds.

If you’re new to investing, we have always pointed you in the direction of index-tracking funds. Index-trackers are a low cost way of gaining exposure to shares, and replicating stock market returns as closely as possible.

But what if replicating the market isn’t enough. How should you invest your money if you want to try and beat it?

There are hundreds of investment strategies to choose from, but you could think about putting some money in managed funds.

What is a managed fund?

A managed fund is run by a professional fund manager who picks shares or other assets with the aim of maximising the return for investors. Naturally, investors have to pay for the fund manager’s expertise. But these funds have often been criticised for charging well over the odds and underperforming the market.

How do you choose a good managed fund?

Not all funds should be tarred with the same brush as some perform much better than others. So how do you choose the right one?

As a first-time investor it’s probably a good idea to stick to funds run by large, well-established fund managers who have a good reputation. You can find out more about the top fund managers from Trustnet.

Past performance and charges

You should also review the long-term performance track record of any fund you’re interested in. This data is widely available, but again I like Trustnet. But, don’t forget, past performance is never a guide to the future.

You should also check the charges aren’t too high relative to similar funds. The cheapest isn’t necessarily the best, but if the initial charge and annual management charge are excessive they will drag the returns down.

Is the fund right for me?

Finally, make sure any funds are suitable for you as an investor. For example, if you’re reasonably cautious in your attitude to risk, it’s probably a good idea to steer clear of funds which invest in emerging markets or the specialist sector.

You should only invest in managed funds if you’re prepared to hold onto them for at least five years. The stock market is a volatile place which isn’t suitable for a short-term punt if you’re a novice.

Find out more about managed funds for your ISA at lovemoney.com