Choosing investment funds

There are four main steps to choosing funds to invest in:

1. Understand your needs
   Key things you need to think about are your goals, your attitude to risk, and your timeframe.
2. Decide on a type of fund
   Different funds have different objectives, so it's important to invest in those that will help to achieve your goals.
3. Narrow down your choice
   You can narrow down your fund choice further by comparing features such as volatility ratings and charges.
4. Spread your risk
   Investing in a range of different asset classes can help smooth out the ups and downs of the financial markets over the long term.

Before you start, you should be clear about why you're investing and how much risk you're comfortable taking. The length of time you want to invest for will also affect the kinds of funds you choose. Think about:

• Your goals
  Be clear what your goals are and realistic about how much money you'll need to achieve these. For example, are you saving for a deposit on a house or for retirement. Are you looking to take an income from your investments or do you want to leave them to allow your capital to grow?

• Your attitude to risk
  Are you prepared to take more risk for potentially higher returns? Our Risk Questionnaire will help you work out how much risk you're comfortable with. You should also consider how much risk you're able to take, bearing in mind your other financial commitments and personal circumstances.

• The time period
  The longer your timeframe, the more opportunity your investments may have to recover if their value falls. So, if you're investing for your retirement in 30 years' time, you might be prepared to take more risk than if you're saving towards a deposit for a house in, say, five years.

• Your existing investments
  You should consider all your existing investments when assessing how much risk you're prepared and able to take.

There are many ways to compare funds.

Asset classes
Most funds invest across four main asset classes, which are:

Equities (shares) – part ownership in a company.

Bonds – essentially loans to a government or company.

Property – direct investments in buildings and land, as well as indirect investments
such as shares in property companies.

Money market instruments (including cash) – deposits with banks and building societies, as well as governments and large corporations, and other investments that can have more risk and return than deposits, such as certificates of deposit and floating rate notes.

There are also investments that don’t fit into one of these asset class categories. They include direct and indirect investments in real assets like commodities, for example oil or precious metal. They also include investments with specialist characteristics.

As well as choosing to invest by asset class, for example in an equity fund or a bond fund, you can  also invest in a fund which invests in a mix of asset classes. You can also choose to invest by asset  class in a specific location, for example a UK property fund or a European equity fund.

You can also choose to invest according to an investment style or objective. There are a number of alternatives, including:

Income or growth
Most funds look to make money for investors, but income and growth funds aim to achieve this in different ways. While growth funds invest in assets which aim to increase in value over time, income funds invest in assets which focus on producing a steady stream of income, such as equity dividends, bond yields and property rental income.

Please note that any income generated within insured (life and pension) funds is reinvested in the funds rather than paid out to investors.

Active or passive

A passive fund aims, before charges, to track or replicate the performance of an index (such as the FTSE 100) rather than trying to outperform it.

An actively managed fund aims to achieve returns that are above average, using fund manager expertise and experience to identify investments with the potential to outperform.

There’s no guarantee that actively managed funds will outperform passive funds, and they can also be more volatile than passive funds. Additionally, the research and analysis required means actively managed funds tend to be more expensive than passive funds.

Ethical and Shariah funds
You might want to invest according to your beliefs. Funds like ethical and Shariah funds invest your money according to specific selection criteria. As an example, an ethical fund might avoid investment in companies that are involved in weapons manufacture, tobacco products, gambling and nuclear power. 

Speculative
Some funds give you exposure to a particular sector such as technology, telecoms or natural resources. These can offer the potential for strong performance but, the more specialised your fund, the more risk you take as all of the money you have invested in that particular fund is completely exposed to one sector.

Here are some factors to consider when researching and comparing individual funds:

Volatility rating
Every Standard Life fund has a rating based on its volatility (how much its value fluctuates). This varies depending on the asset classes, countries and types of companies the fund invests in. For example, political or economic instability could make it more risky to invest in a particular country.

Performance
Past performance can tell you how a fund has performed. Some funds can also be compared against a sector or benchmark index. But often it's more relevant to consider how a fund has performed against its aims and objectives. Remember, even good past performance is not a guarantee of future performance. Investments fluctuate and it may be worth less than you invested.

Charges
Funds have different charges to reflect the cost of running them. These can include the cost of research and analysis as well as buying and selling the assets.

To spread your risk, you should consider having a portfolio which invests in a broad spread of asset classes. Then you won't need to rely on the performance of a single investment or asset class.

You can build your own portfolio by investing in a number of funds or you can use one of these options to get diversification within a single fund:

• Managed funds
  These are normally managed by a single fund manager, who will choose the mix of assets that make up the fund on your behalf.

• Multi-manager funds
  These invest in a range of funds from a variety of fund managers, aiming to select the best managers and mix of assets on your behalf.

• MyFolio
  MyFolio funds are 25 carefully constructed investment portfolios, managed by Standard Life Investments, which reflect different investment styles, risk levels and asset mixes. For more information about the MyFolio range, see the 'MyFolio Funds customer guide'.