How to select your funds

There are four main steps to choosing a fund:

1. Understand your needs
   Key things you need to think about are your goals, your attitude to risk and your time frame.
2. Decide on a type of fund
   Funds have all sorts of 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 by comparing features such as volatility, fund rating and charges.
4. Spread your risk
   Investing in a range of different asset classes can help smooth out the ups and downs of the stock market over the long term.

Before you start, you should be clear about why you are investing and how much risk you are comfortable taking. The length of time you are prepared to tie up your money will also affect the kind of fund you choose. Think about:

• Your goals
  Be clear why you are investing. It could be for a specific goal, such as a deposit on a house, or are you saving for retirement? Are you looking for an income from your investments, or do you want 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 are comfortable with.

• The time period
  The longer your time frame, 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 consider taking more risk than if you are saving towards a mortgage deposit in, say, five years.

• Your existing investments
  You should consider all of your existing investments when assessing your exposure to risk.

There are many ways to compare funds.

Asset classes
Funds invest across the four main asset classes, which are:

Shares – a stake in a company.

Bonds – a loan to a company or a government.

Property – a physical building, whether commercial or residential.

Cash / Money Market – deposits and other money market instruments such as Certificates of Deposit and Floating Rate Notes.

While you can choose to invest by asset class, for example a property fund or a corporate bond fund, you can also 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 investment style or objective. There are a number of alternatives, including:

Income or growth
Most investment funds look to make money but some will aim to deliver this as a regular income stream, which could be useful, for example, if you want to supplement your earnings or pension. Some of these funds aim to achieve this by investing in assets such as bonds, which pay interest, or in certain shares that traditionally pay high dividends.

Growth funds invest in assets that will aim to increase in value over time.

Active or passive
Actively managed funds aim to out perform their index or benchmark, with the manager using their expertise and experience to spot investments with the potential to out-perform.

Passively managed funds aim to match the performance of an index such as the FTSE 100 rather than trying to out-perform.

There’s no guarantee the actively managed funds will outperform passive ones. Additionally, the research and analysis required means active funds tend to be more expensive than passively managed funds.

Ethical and Shariah funds
You can also 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 you’re completely exposed to that 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 type of companies the fund invests in. For example, political instability could make it more risky to invest in a particular country.

Performance
Past performance can tell you how a fund has performed but it is also important to compare its performance with other funds in the sector and its benchmark index. Has the fund achieved its aim?

Remember, even good past performance is not a guarantee of future performance. Investments fluctuate and you may get back 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.

You can help to manage risk by having a spread of asset classes in a well diversified portfolio. This means if one performs badly, your whole portfolio may not suffer as badly.

You can build your own portfolio or you can use one of these options to get instant diversification:

• Managed funds
  These are run by a fund manager who selects a broad range of assets on your behalf.

• Multi-manager funds
  These invest in a portfolio of funds or managers, aiming to select the best managers and assets on your behalf.

• MyFolio
  Standard Life’s MyFolio Funds are a family of investment portfolios, carefully constructed to give you a choice of five risk levels. You can also select whether you want active or passive investment management. MyFolio range is not available with our Stakeholder pension.