Five steps to choosing a fund
With more than 3,000 funds available in the UK, choosing a fund can be daunting, but getting it right (or wrong!) can have a huge impact on your investments.
Here are five steps to help you to decide.
1. What are you saving for?
Every investor is unique, with different goals and aspirations. so one of the first things to do is to think about what you, personally, are investing for.
Are you putting money aside for your children's education? Are you saving for your retirement or just a 'rainy day'?
Always keep your own circumstances in mind when picking a fund and remember to look at those that are suitable for you, not just those that happen to be popular at the time. What is right for one person is not necessarily right for another.
2. How long have you got?
Generally, the longer the time horizon before you need to realise your investment, the riskier you can afford to be (although obviously your personal attitude to risk is key).
For instance, if you are saving to pay off a mortgage, you may wish to have a higher risk profile in the early years when your investment has 25 years to run, but in later years a lower-risk strategy would be appropriate.
3. How much risk are you willing to take?
Risk is very personal and what one investor may consider high-risk could be medium-risk to another.
So when choosing a fund it is important to be honest with yourself and consider how much risk you are willing to take.
A good question to ask yourself is: “How much can I afford to lose in the short term?”.
Different funds will have different risk profiles. For example, an emerging market equity fund will be deemed higher risk than a strategic bond fund. But within each sector, different funds will have different risk profiles too – one emerging market equity fund may be more risky than another.
Chelsea's fund research team provides a Chelsea Risk Rating - a generic guide to the relative risk of more than 400 of the funds available to investors.
Funds assigned a 1 are considered as the lowest risk and 10 the highest. However, it is important to remember that even funds rated 1 are subject to some risk.
4. Decide on an asset class
Once you have in mind your goal(s), time horizon and attitude to risk, you can think about the asset class in which you wish to invest. For example, you may want to consider equities, bonds, property, commodities or a combination.
If you are adding to an existing portfolio of funds, consider what effect any new fund will have on the overall balance of that portfolio. Will it make your stance more aggressive or more cautious? Will it mean that you are over-exposed to a certain asset, market or sector, or will it be filling a gap?
5. Pick a fund!
Hopefully by now you are now feeling more confident about making a fund choice.
When looking at individual funds, it is important not to simply look at its past performance – it may have done well in the past, but that is no guarantee it will do well in the future.
Some other points to consider are:
- How long has the manager been running the fund and do they have experience of managing money in different market conditions?
- What support/resources does the manager have?
- Make sure you know exactly what the fund is investing in – a good rule of thumb is never invest in anything you don't fully understand.
- What will it cost? The cost of a fund can impact the returns it makes, and so is an important consideration. However, at Chelsea we are firm believers that returns after costs are more important. We would rather pay a little more for a fund that should do better for us over the longer term, rather than pay less for a fund that will under perform.
Still too much choice?
If you are still unsure, we offer further guidance. We've done some of the hard work for you and whittled down the universe to around 100 funds on our Selection list and around 40 funds on the Chelsea Core Selection.
You can use these lists as a guide when choosing a fund, with the comfort of knowing that our dedicated research team has interviewed every manager and every fund has undergone a rigorous process to earn its place in our research tables.
Please note, however, that Chelsea does not provide investment advice and so if you are unsure, please seek professional advice before investing.
The VT Chelsea Managed Funds
This is a relatively new offering from the research team, but our fund-picking skills are not. The VT Chelsea Managed Funds offer a complete investment solution. Find out more here.
Important Notice
Chelsea Financial Services is authorised and regulated by the Financial Conduct Authority and offers an execution-only service. FCA reference number 114493. Past performance is not a reliable guide to future returns. You may not get back the amount originally invested. Tax treatment depends on your individual circumstances and may be subject to change in the future. Whilst we may draw attention to certain investment products, we cannot know which of them, if any, is best for your particular circumstances and must leave that judgement to you. If you are unsure about the suitability of any investment you should seek professional advice. For full terms and conditions please visit www.chelseafs.co.uk.