November 9, 2022

How to Choose Investment Funds – A Complete Guide

Choosing investment funds can be a minefield, but getting started is easier than you think. Whether you’re saving for your first home or investing for retirement, anyone has the potential to see their money grow. It’s time to dispel the fear.

HWWA Consulting specialises in the provision of employee benefits for a broad range of businesses. We offer workplace financial education sessions to help employers empower their workforce with solid advice.

If you’re ready to make your money work for you, we’re here to show you the way.

What is an Investment Fund?

An investment fund is a pool of capital supplied by multiple investors that is used to invest in securities as a collective, with each investor maintaining ownership of their individual shares. Investments are usually made and managed by a professional fund manager who monitors the performance of the fund and makes adjustments as and when required, according to a specific strategy.

How to Choose an Investment Fund

Choose Type of Fund

Investment funds can be split into various different categories. The right option for you will depend on your goals, your attitude to risk, and the level of returns you want to achieve. Though not an exhaustive list, some of the funds you might come across include:

  • Income Funds – these aim to provide an income from investments through investing in companies with a strong and consistent performance.
  • Growth Funds – funds invested in companies with better-than-average growth prospects. Here, the goal is to appreciate capital over a longer period of time, rather than provide regular income.
  • Value Funds – investments in stocks that are currently undervalued with the hope that they will appreciate over time and sell at a profit.
  • Tracker Funds – funds that track a particular index; rising and falling in line with market performance and typically invested over a long period of time to mitigate downturns.

Assess Level of Risk

Financial risk is not the same as risk in our daily lives, but it does need to be considered. Typically, there is a correlation between level of risk and return, though returns are never guaranteed. Risk here refers to the likelihood of an investment falling in value. Though a higher level of risk means a higher risk of losing money, it also offers the potential for higher returns.

Risk is determined by various factors, including the asset class, the size of the company you’re investing in, the region of the investment, and the length of time you invest for. Those with less experience investing and a lower appetite for risk may favour a lower but potentially steadier return. However, high risk can be mitigated by investing for a longer period of time and cultivating a diverse portfolio.

Do Your Research

Choosing a suitable fund relies on doing your research. You should never invest your money in anything where you don’t fully understand the risk or investment strategy. Make sure you assess independent fund ratings, fund factsheets, fund quarterly updates, and value assessment reports to gain a full picture of the fund’s strategy, structure, and prospects.

It’s also important to explore the track record of prospective funds to gain an idea of their performance in previous years and read through any existing reviews. Remember though, previous successes don’t guarantee future performance.

Think Through Timeframe

Growth doesn’t happen overnight, so it’s advisable to leave your money invested for a number of years – ideally a minimum of 5 or 6. Having a long term perspective enables you to mitigate some of the risk associated with investing, because it means you can ride out short term fluctuations in fund performance.

Long term investing also offers the potential for compounding. This means the returns you achieve are reinvested into the fund, further increasing the amount you can earn. Essentially, the longer your money stays invested in the fund, the greater the opportunities for growth.

Be Diverse

An investment fund should ideally hold a balanced mix of assets to spread your exposure to financial risk. That goes for any investment decision; diversity is the aim of the game. Simply put, for a portfolio to be considered diverse, it should include assets from multiple classes, sectors, and regions. However, the number of assets should be rationalised by your ability to research and monitor them.

To gain an idea of the holdings of an investment fund, you should look at the fund fact sheet. This will typically only include the top 10 holdings. You may have to wait until an up-to-date list is published once or twice a year to gain a complete understanding. Certain fund managers do publish their holdings more frequently, and some even allow continual access.

Consider Fees & Charges

Before you launch into a new investment, make sure you understand what fees and charges are involved and assess the charging structure. It’s likely there will be regular management charges as well as an annual fee for the platform that holds the investment.

Though thinking through the costs involved with investing is extremely important, that doesn’t mean it should necessarily be the determining factor in your decision. Choosing a fund that costs more may perform better in the long term. Price isn’t the be all or end all when choosing funds; other factors are just as critical and may justify the charges in the end.

Understand Your Impact

More and more people are looking for ways to invest positively in the world around them. Some pension funds have come under fire for funding the climate crisis and deforestation, prompting many investors to reassess where their money is going and what it is contributing to. Investing with environmental and social responsibility in mind is also purported by some to be a way of managing risk.

ESG criteria can provide an overview of a company’s performance for environmental and social responsibility, as well as management transparency. However, ESG is not regulated by a single authority meaning it can be tricky to determine which funds are merely ‘impact washing’. Once again, it comes down to doing your research and aligning financial decisions with your personal views and values.

Trust Yourself

You know more than you think. Misunderstanding and trepidation prevent many people from harnessing the power of investing, but don’t let financial terminology, confusing figures, and a fear of market fluctuations put you off. With common sense, plenty of research, and a considered approach, your money has the potential to grow over time and fuel your ambitions for the future.

Financial Education for Your Workplace

At HWWA Consulting, we know the power of financial education. We help businesses empower their employees to make better financial decisions with seminars, workshops, and one-to-ones. We know workplace wellbeing is about so much more than cycle-to-work schemes and lunchtime yoga sessions; it’s also about financial health. Employees who feel better informed and supported to make financial decisions are less likely to suffer money worries, and more likely to stick around.

Ready to empower your workforce? Let’s get started today.

Employee looking to learn? Great, let your employer know about our services!

*Note: when investing, your capital is at risk, and you may not get back the full amount invested.*

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