Investment

Fund Selection

There are thousands and thousand of different funds available, covering a huge variety of underlying investments. Where do you start, when deciding which ones to invest in?

Essentially, you need to decide what you want your investment to achieve for you. Key factors will include:

• What level of returns would you realistically hope for?
• How much risk are you prepared to take?
• How long do you anticipate keeping the investment?

The answers to these questions will determine what balance of assets is right for you. Many investors are now using funds supermarkets to help in fund selection. Find out more here.

Generally, in order to achieve the potential for high returns, you have to be prepared to accept the volatility of funds which invest primarily in equities. If your target is simply to achieve a net return that would be higher than leaving your money in the building society, you would select funds with a higher proportion of fixed interest securities, and you may also include some property funds.

Information Sheet: Understanding investment funds

It is usually desirable for investment portfolios to be diversified (to avoid having 'all your eggs in one basket'). For a balanced portfolio, the diversification will ensure that different asset classes are represented, while a more adventurous portfolio may be focused primarily on equities, achieving diversification by having exposure to different economies, sectors and investment manager approaches.

Information Sheet: Understanding diversification

There are, broadly speaking, three approaches to selecting a fund portfolio: -

• Specialist funds, usually with the objective of investing primarily in specific countries or sectors;
• Managed funds, where a greater level of diversification will be provided within the fund, between asset classes and / or countries and sectors;
• Multimanager funds, which bring together investment funds and approaches from a wide range of different fund managers, in a single fund.

Information Sheets: Building an investment portfolio, and Understanding multimanager funds

Having decided on the asset allocation and approach, you will probably find yourself faced with a multitude of funds that appear to meet your requirements. In the absence of an effective crystal ball, how do you decide which will perform best? Even professional investors cannot achieve this consistently! There are, however, some criteria that can help in your decision.

While it is true that past performance of a fund is not necessarily an indication of future performance, it is still not a bad starting point, provided that it is taken over various time periods and that it is not considered in isolation. There are also various independent agencies that award ratings to funds, based on specific criteria. Forsyth OBSR, Standard & Poors and Morningstar are amongst the best known and most widely used. However, when a fund experiences a significant change, such as the departure of a successful fund manager, historical data can be less relevant. A talented fund manager can make an enormous difference. Citywire has a system that rates individual fund managers, taking into account their personal historical performance, if they have changed fund.

Information Sheet: Funds Rating

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