With thousands of different funds to choose from, picking which ones to invest in can seem a daunting task, particularly if you’re new to investing.
Of course, you’re not limited to investing in funds, with plenty of other assets such as shares and bonds on offer, but when you put money into a fund, it’s spread across a wide range of investments, which helps you to diversify your risk.
Remember that investing will only be suitable for you if you have a timeframe of at least five years, but preferably longer. That's because if there are any market downturns, hopefully this will provide enough time for your investments to recover, although it may not.
Bear in mind too that no matter which funds you choose, there are never any guarantees of a positive return. Investments may fall in value as well as rise, and you could get back less than you initially invested.
Here, we look at some of the ways you can narrow down your choices and choose the right funds to suit your needs. We don’t offer personal financial advice, so if you’re unsure where to invest, seek professional advice.
Start with some research
Funds cover a range of asset classes, markets and geographies, so a good starting point is to do a bit of research to help you decide which sectors or regions you think may perform well over the long-term.
You may for example, decide you want to put money into a tracker fund which aims to replicate the performance of the FTSE 100 index of Britain’s biggest companies, or, alternatively, you might prefer to adopt a more global approach, investing in companies worldwide. Or, if you are interested in a particular sector, for example, technology or property, you may choose to invest in a fund specialising in this area.
Bear in mind that it’s important to ensure your portfolio is properly diversified across a wide range of asset types and sectors, so that if one investment performs badly, hopefully other investments with higher returns will make up for any losses. This means you may want to choose five or six different funds to help spread risk.
Our Research Centre offers a number of tools and resources to help you research and find the right investments for your needs, whatever you’re interested in investing in.
Consider your approach to risk
As with all investments, the greater the potential returns on offer, typically, the higher the risk you must be prepared to take. For example, investing in an emerging market fund that focuses on countries with economies still in the development phase such as India or Brazil will be higher risk than a fund that invests in UK equities, so you’ll need a particularly strong appetite for risk.
It’s important to check that your fund choices match your approach to risk. However, whatever your risk tolerance, you’ll ideally spread risk by investing in a wide range of investments so you’re not relying on one region or sector too heavily.