DIY Investor Magazine
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June 2017
44
FOCUS ON FUNDS: HOW TO SELECT A FUND
By Georgette Harrison
Selecting a fund or funds can seem overwhelming
from the thousands to choose from, so here are some
pointers to bear in mind.
There is definitely some thinking to do before you get to
the point of selecting the funds.
FIRST ASK YOURSELF THREE KEY QUESTIONS:
WHAT ARE MY INVESTMENT GOALS?
Are you
planning to use dividends to provide an income, or are
you looking to grow your capital? These decisions will
often depend on which life stage you are at. Perhaps
you want to supplement other retirement income or you
are saving for a rainy day.
WHAT IS YOUR ATTITUDE TO RISK?
There is a trade-
off between risk and reward; it is generally assumed
that the more risk you are prepared to take, the higher
the potential returns, whereas if you are very cautious
with your investments, you can anticipate lower returns.
In other words, this is the ‘can you sleep easy’ test.
Are you prepared to be more adventurous with your
investments and are you happy to take a risk with the
investment choices that you make, in the hope that
you will make gains. If you feel uncomfortable with that
thought, you probably sit at the cautious end of the
spectrum. One sage piece of advice is don’t risk what
you can’t afford to lose.
to learn more about risk.
What is your time frame? Received wisdom is that the
longer the time frame you have to hold your investments,
the more risk you might be able to take on, as there is
potentially opportunity to ride out some of the inevitable
peaks and troughs of stock market performance.
THE NEXT STEP IS TO CONSIDER THESE POINTS:
DIVERSIFICATION
The old adage ‘Don’t put all your eggs in one basket’
holds true here. As you are selecting a fund, you will
already have a level of diversification (as the fund will
hold multiple individual company shares or different
types of investment vehicle), however, it is important
that you consider increasing this. Greater diversification
should help reduce risk.
If you are invested in one particular sector which is
impacted by events and the value of company shares
in that sector falls, you are overly exposed to that risk.
Whereas, if you have spread your investments across
different sectors, you will have also spread your risk and
reduced the impact of a sector underperforming.
ASSET ALLOCATION
Add up all the assets you have across equities, fixed
interest, property and cash and work out what the
percentage split is to give you your ‘asset allocation’.
Think again about what your investment goals are and
to what degree these are currently being met by your
existing asset allocation. If there is scope for change
to meet your objectives, the next step is to look at the
different fund categories.
There’s an old rule of thumb which suggests
you should subtract your age from 100 and
the difference should be the percentage of
your portfolio that you hold in equities. For
example, if you are 55, around 45% of your
assets should be held in stocks and shares.
Now that people are living longer and need
a greater accumulation of capital, it might be
wiser to subtract from 110 or even 120. There is
then longer to take advantage of the potentially
higher returns that shares offer.
FUND CATEGORIES
The Investment Association, the trade body that
represents UK investment managers, splits funds into
different sectors and most fund names will reflect the
area or type of investment.
