Choosing the best funds to invest is a challenge with the thousands on offer, but with a logical strategy in place, you will find it easier to find the best funds for your needs.
Select a House for your Funds
Firstly, you need a ‘house’ or ‘account’ for your funds, other guides go into the details here – but always remember to max out your Stocks & Shares ISA before moving onto regular dealing accounts. Likewise, consider a Self-Invested Personal Pension if you are looking for complete control over your pension.
Understand your Circumstances & Goals
How much money do you have to investing, why are you investing and how long are you to invest for? This matters. Let’s say you are fortunate enough to have a good amount of wealth and looking for a return in excess of 15% per year over a period of 7 years. You can afford to take more risks.
This is why you may look at investing in a smaller companies fund. Looking to secure solid capital growth from a fund that can accurately pick successful businesses in the future.
Conversely, let’s say you are looking to save purely with retirement in mind with an investment horizon of 20 years. You will most likely be looking for the more certainty that a Global or UK Equity Fund can provide – by investing in larger, more established companies.
Understanding what you are investing for often determines the rest.
Investing for Growth or Income?
The two main reasons for investing are either for capital growth or income (although you can get both). It’s important to decide you understand what you are looking for as this will determine the the best fund(s) for you. Other guides note the Fund Sectors as defined by The Investment Association start with the groupings of Income and Growth among a handful of others.
Active, Passive or Somewhere in Between?
The next general hurdle to clear is whether you are looking to invest in an Active Fund (run by a fund manager to beat or exceed an index), a Passive Fund (designed to track an index such as the FTSE 100 – so if it increases, your investment increases) or somewhere in-between with something like ready-made portfolios.
All have their pros, Active Funds try to exceed a benchmark (so you could profit more, but no guarantee), Passive Funds are cheaper to invest in and ready-made portfolios can invest in lots of funds.
Drilling Down into the Detail
So let’s say you’ve decided you are investing for income, you are looking for active funds. The next port of call is to consider the sectors that fall within Income.
These are Bond Funds, Gilt Funds, Equity Income Funds (Global & UK) or Mixed Asset (Bond & Equity). If you were also considering Growth, then you’d be looking at UK Equity Funds or funds that invest in overseas equities such as North America Funds or Global Emerging Markets Funds.
Trying to Make a Choice – Narrowing it Down Further
So no you’re probably still down to a choice of 000’s of possible funds! But the good news is there are steps you can take to narrow it down further:
- Assess Fund Sector Performance – You can often view the best performing funds in each sector. Whilst the past is no guarantee to the future, no one wants to invest in a fund that has historically under performed consistently!
- Identify Start Fund Managers – You could take confidence in fund managers that are known to have excellent reputations and part of large, reputable asset management companies. Whilst this doesn’t always work, it can provide some confidence.
- Read the Fund Factsheet – Look at the Fund Factsheet, view the objectives of the fund, it’s top 10 holdings, the performance in comparison to its benchmark and the Assets under Management. All can give you confidence.
- Identify the Risk-Level of the Fund – Funds will also have a Key Investor Investor Document (KIDD). With this document, you will see a risk profile of the fund (from 1 to 7); 1 means less risk and less potential reward, 7 means higher on both fronts (although not guaranteed).
- Reference Best Buy Lists – Fund Supermarkets or Online Brokers will tend to produce ‘best buy’ lists, narrowing a selection of 000’s of funds down to 50 or so. You can use these to gain ideas, but you must follow your own research in deciding whether to buy. Remember, this is ‘DIY Investing’ – if you invest in something you are not comfortable with, you can’t complain. You must have confidence in every decision you make and not because someone else told you to!
Know what you are Looking for, Find what you are looking for
Finding the best fund to invest in all starts with you. Understanding why you are investing and what you are looking to achieve from investing is the very start of your journey. From there you can continue to narrow the window of choice before deciding.
But as with shares, avoid the temptation to buy something just because someone or a list says so – the choice you make is the one you need to believe in. With so much information available at your fingertips, you should make use of it!