How to pick the right funds for your money
Choosing which funds to invest in is a big decision, and there are three main considerations to help you decide which funds are best for you.
Risk: - and your attitude to it
Asset classes: - five main types of investment
Type of fund management: - active or passive
What's your attitude to risk?
It's important to decide how you feel about risk and reward before making an investment.
We have lots of funds you can invest in, involving different levels of risk. How your money is invested depends on how much risk you're prepared to accept.
Your aim should be that over the long-term any investment you make will go up in value. But of course values can also go down and, for high risk investments in particular, there's always the risk that your investment will be worth less than it was when you originally made it.
What are asset classes?
Asset classes are the five main types of investment a fund can invest in:
- Cash: money on deposit (e.g. cash in a bank).
- Bonds: loans to companies or governments.
- Property: bricks and mortar, property equities or REITs (Real Estate Investment Trusts).
- Equities: investment in company shares
- Alternatives: includes commodities eg gold, copper, water infrastructure and agriculture.
Each asset class works in a different way and has its own rewards and risks, so it's important to understand how they work before you make any investment decisions.
What are active funds?
Active funds are 'actively' managed by a fund manager, who buys and sells investments on behalf of the fund in order to maximise gains and minimise losses. As the fund is actively managed, the fund managers can strategically react to market situations, taking advantage of insights and opportunities as they happen.
For example, when a particular sector looks like it might be on the up, or one region starts to suffer, the fund manager can move your money either to expose you to this growth or protect you from potential losses.
An actively managed fund offers the potential for higher returns than that of a passive fund, which simply track the particular stock market which the investments sit in.
What are passive funds?
Rather than trying to anticipate and identify growth opportunities, passive investment funds simply track a particular stock market, such as the NASDAQ. Instead of investing in some of the assets in the market, a passive fund will buy across all the assets in a market, to give you a return that reflects how the market in general is performing.
So when the stock market index rises, the value of your fund rises with it. And when the index falls, your investment in the fund falls with it too.