Are you investing for growth, income or both?

You should consider whether you are primarily investing for growth, income or both. If you want some income, but no risk to your capital, you could choose a money market or cash fund, which means a professional investor will be working to get the best available interest rates. If, however, you are willing to take some risk with your capital, you may wish to choose a fund that invests in bonds, which provide a rate of interest higher than is available with cash. Alternatively, there are equity funds that invest in shares of companies and seek to generate income rather than capital growth, aiming to pay out higher than average dividends. Funds that offer a mixture of both shares and bonds are known as managed funds.

 

Living up to your expectations
It’s also a good idea to check that your funds are living up to your expectations. Don’t be too alarmed by short-term disappointments – even the best funds go through difficult patches. However, if your funds are consistently achieving less impressive results than their rivals, it could be time to think about a change.

All funds that invest in shares are subject to the movements of the stock market. A ‘passive’ fund or ‘index tracker’ is designed to follow the value of a particular index, such as the FTSE 100. In general, an ‘active’ fund manager’s aim is to reduce risk and generate better returns than the index for long-term investors, through in-depth research and a long-term outlook on companies’ development.

Wider range of underlying investments
You might also want to think about whether the fund is ‘aggressive’. This usually means that it invests in fewer companies and is, therefore, potentially more risky than a fund adopting a more cautious approach, which is typically likely to have a wider range of underlying investments. Some funds invest mainly in small companies, which also generally implies that they are higher risk than funds investing in larger, usually more established companies.

In the case of share and bond funds, you will want to think about the focus of the fund. Some funds specialise in, for example, a geographical area such as North America, or in a particular sector such as technology. You might want to start with a broadly based fund and then, if you are able to invest more over time, you could choose to add more specialised funds to your overall portfolio.

Diversifying between different types of investment
Mixed funds are funds that diversify between different types of investment, meaning they invest in a mixture of cash, bonds, shares, pooled funds, property and derivatives.

Protected funds are ‘protected’ or ‘guaranteed’ to limit losses if the market goes down, or to give you assurance that you will get back at least a certain amount after a specified length of time. It is unlikely that such funds will grow as fast as unprotected funds when the stock market is performing well, as you have to pay for the cost of protection.

Funds that invest only in companies meeting certain ‘ethical’ criteria are known as socially responsible funds. They avoid, for example, tobacco companies or those that test on animals.

Investing in a range of funds
Funds of funds and manager of managers are designed to give investors a chance to invest in a range of funds. A fund of funds is where the fund in which you are invested invests in several other funds. A manager of managers chooses several managers to manage different parts of a pool of money.

Money market funds are designed to offer higher returns than a building society account but still have the same level of security. They invest in bank deposits and are generally called ‘cash funds’. Some invest in short-term money market securities.

Property funds invest either directly or indirectly in property or property-related assets. A fund that invests directly will buy physical property, such as a shopping centre, in order to generate rental income. A fund that invests indirectly will purchase more liquid assets, such as property derivatives, REITS or shares in a property company.

Drip-feeding money
You don’t have to have a lump sum in order to invest. Regular savings plans allow you to contribute relatively small amounts of money on a monthly basis and build up a capital sum. By drip-feeding money into a fund regularly, you could avoid investing all of your money at the peak of the market, when prices are high. However, you may miss the opportunity to invest at the bottom of the market, when prices are cheaper.

Achieving the right mix of assets should be your first decision and it is a good idea to diversify the types of fund you invest in. No matter what your investment goals are and how much you wish to invest, if you would like us to review your particular situation, please contact us.