6 Steps to Choosing a Fund
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When it comes to funds you don’t have to do the investment work (that’s the fund manager’s job) but you do have to choose which fund you want (sorry, you’re not off the hook entirely). Each one comes with a Fund Factsheet and a Key Investor Information Document (KIID). These are packed with essential information, which we’ve spelled out for you below to help make up your mind.
Not confident in your financial prowess? No biggie. You can get one-off advice from a Financial Advisor.
Here’s our checklist to help you choose wisely…
#1 Past performance
It’s not a guarantee of the future but you still want a fund that has a proven track record. It’s best to look at the fund’s Past Performance over the longer terms, say over 3, 5 and 10 years. In the Fund Factsheet you’ll find a table of the past five year’s performance by percentage increase (or decrease) and a chart showing the performance against a benchmark to compare how well the fund has done against similar investments. You want to make sure the Fund Manager is earning their fee!
#2 The charges
Most funds have an Ongoing Charges Figure (OCF) - aka a Total Expense Ratio (TER) - where you pay a percentage of your investment towards managing the fund. This can range from 0.1% to 2.0% a year, which is £10 to £200 for every £10,000 invested. The riskier funds, aiming for higher returns, charge the most while the tracker funds charge the least because they don’t require ongoing management. Whatever the charge, you want to be happy with the return after the fee has been deducted.
There may also be other fees including:
Entry or Initial Charge… a fee to enter the fund usually charged as a percentage of your total investment.
Exit Charge… a fee to leave the fund.
Performance Fee… a payment to the fund managers if the fund makes a profit. It is a percentage of the profit made (cheeky we know, but if they’re that good they can get away with it!).
Fees should always be clearly displayed on the fund information page but, if in doubt, look at the KIID since it’s the law to include them within it.
#3 The risk level
You’ll need to decide if you want a low, medium or high risk fund. There are a number of things you can look at to gauge risk:
Risk Profile… is a score from 1 to 7, 1 being the lowest risk and 7 being the highest.
Asset Allocation… refers to all the assets (think: cash, bonds, property, stocks and commodities) in the fund and the percentage breakdown.
Regional Allocation… is the list of countries the fund has invested in.
Risk Factors… highlights the specific risks.
A word to the wise: Funds packed with commodities and equities carry a higher risk than those with more bonds and cash. Also, funds focusing on emerging countries – Brazil, India, China, and Russia for example – are riskier. More risk means a larger change in your money’s value (both up and down) is more likely!
#4 Industries, companies and countries. What this means for you.
It’s great for sun-drenched holidays but we’ll pass on investing in Greece, thanks. A solar-power start-up? Now that’s the ticket! Make a list of any business or region you definitely do or definitely don’t want to support. This could be on moral grounds or you may have a long-term view on an industry, such as technology, healthcare and consumer goods, that you expect to do well. Every Fund Factsheet gives you the below information.
Sector Breakdown... all the industries the fund has invested in.
Regional Allocation… the countries the fund has invested in.
Top 10 Holdings… a list of the companies making up the largest portion of the fund.
#5 Who’s behind the fund?
You’ll also find the name of the Fund Manager and how long he or she has worked there. Look up how the fund has performed over this period. Is it consistently good? Bad? Meh? The KIID also provides the fund’s Objective and Investment Policy, which gives you an idea of the manager’s strategy and goals.
If you decide on a tracker fund (aka passive fund) - which requires no manager as follows a fixed list of investment - you can move on to step 5.
#6 Income or Accumulation…
After deciding on the fund you want to invest in you may have a choice between opening an Income (Inc) or Accumulation (Acc) version of the fund. Buying an Income fund would mean that your net income from the fund would be reguarly paid out in cash to your selected bank account. Buying an Accumulation fund means income would be reinvested back into the fund.
Which one should I go for?
If you want to use income from the fund towards your living expenses then go for an income fund. If you want to grow your investment pot over time and access the money later then an accumulation fund is for you.