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Four Steps To Selecting An Investment Fund



What’s the right fund for you? Our four-step guide will help you decide.

3 min read

Investing through a fund doesn’t have to be difficult providing you think carefully about your reasons, goals and timescales.

1. Forget The Past And Look To The Future 

You might think the best approach is to look at past returns. However, funds that have performed well in recent years may struggle in the future. Notably, the industry’s performance figures are distorted by survivorship bias, which hides the fact that many funds shut down each year due to poor returns. Although it can be useful to see how a fund has performed, past performance should never be taken as a guide to future performance.

Over the long term, investments have the potential to beat the effects of inflation and help you achieve your goals – although you should be prepared to leave your money alone for five years or more.

It’s a well-known piece of investment wisdom that the value of an investment can go down as well as up and that you may not get back as much as you invested. Another basic principle of investing is that to improve your chance of a higher return you have to accept more risk of losing money.

2. Think About Risk

In investment terms, ‘risk’ combines the possibility of gains as well as losses. A key measure of risk is volatility. A highly volatile asset will potentially gain or lose value faster and more frequently than a lower risk asset.

So, a high-risk approach means there is more potential for gains but a greater risk of losing some or all of your investment, while a low-risk approach means that potential gains are likely to be more muted, as well as possibly reducing the scale of losses.

Accepting more risk means being comfortable with a higher range of results, on the downside as well as the upside. A good five-year performance track record may come with a background of periods of underperformance or even losses. On the other hand, more modest performance figures could be the product of a ‘slow and steady’ return with better potential to preserve your capital at any given time than a fund with a more volatile record.

Deciding your comfort level with risk is key to choosing the right fund.

“It’s well worth taking the time to think about what you really want from your investments.”

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3. Consider What You're Investing For

It’s well worth taking the time to think about what you really want from your investments. For many people, investing forms part of a long term plan to build up a pot of money for later life. Or you may be looking to pay for something specific such as university or wedding fees for children or grandchildren, or helping them with a deposit for a first property.

The timescale will have a big impact on the type of fund that is appropriate for you. Are you comfortable with only minor short-term rises and falls in value? Or can you accept more volatility, including the possibility of longer periods of poor performance or even loss, to achieve potentially higher long-term returns?

Saving for shorter-term goals – money you might need in five years from now – may be more suited to the lower-risk approach. Whereas saving for the longer-term means you may have time to ride out some of the short, sharp ups and downs of higher risk funds.

4. Get The Right Mix

Funds manage risk by holding different types of asset, including equities which are typically seen as ‘riskier’ than bonds. Adjusting the proportion in one or the other asset type is a key tool to help manage risk.

In addition, spreading investments across different markets and sectors can help moderate risk – so while a dedicated technology fund may give you early exposure to the next Facebook or Google, you are at risk of the entire technology sector falling in value.

Multi-asset funds are a simple way to get exposure to a range of markets and asset classes if you don’t have the time, experience or knowledge to put together a portfolio and oversee its performance. They aim to deliver returns by investing in a broad range of asset classes such as cash, bonds, equities, commodities and property.

Here at Coutts the asset mix in our own multi-asset funds is carefully chosen by our experts to reflect our house view and provide diversification, so if one aspect of the fund dips other assets should help to balance out the effect. This helps manage the overall risk.

Funds also allow you to take advantage of tax-efficient investment wrappers including individual savings accounts (ISAs) and self-invested personal pensions (SIPPs).

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

Key Takeaways

Carefully considering why you want to invest and for how long can help you choose the right investment fund for you. Our four steps to getting it right are: don’t rely on past performance, think about the risk involved, consider your ultimate goal and look for the right mix of assets.

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With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management.

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