Investment funds are a popular way for British people to invest their money. They provide a ready-made, diversified investment portfolio with an expert manager who makes decisions on where to invest your money. There are a large number of types of funds available to choose from, and it can be difficult to know how to evaluate them. This article takes a look at the different types of funds, how to evaluate their performance, and some key considerations when deciding which fund to invest in.
Types of Investment Funds
The two main types of investment funds available in the UK are active funds and passive funds. Active funds are managed by a fund manager who makes decisions on where to invest the funds. The manager takes into account factors such as market trends, company performance and economic conditions when deciding where to invest the funds, and the aim is to outperform a benchmark index. Passive funds, on the other hand, are designed to simply track the performance of a certain index or sector. They don’t require a fund manager, and they are much cheaper to invest in.
There are many other types of funds available, including sector funds, ethical funds, and offshore funds. Each type of fund has its own unique characteristics and objective. It’s important to understand the different types of funds available, and how their characteristics fit with your investment goals.
Evaluating Fund Performance
When evaluating the performance of a fund, it’s important to look beyond its recent performance. Past performance is not a reliable indicator of future performance, and the fund’s profile should be assessed over a longer period of time. A good way to assess the fund’s performance is to look at its Sharpe ratio. This ratio measures how much return you’re getting per unit of risk, and it can help you compare different funds.
It’s also important to look at the fees charged by the fund manager. Some funds have high management fees that can erode your returns over time. It’s also important to look at any other charges that may be associated with the fund, such as trading fees and exit charges.
Key Considerations
When investing your money in an investment fund, there are several key considerations.
The first is to make sure the fund is invested in appropriate sectors and companies. It’s important to understand the fund’s investment objectives, and whether they align with your investment goals.
The second is to make sure the fund is well diversified. Diversification reduces the risk of your investment portfolio, as it spreads your money across a variety of assets and sectors.
The third is to make sure the fund is managed by an experienced and credible fund manager. A good fund manager will have a proven track record of success and be transparent about how they manage the fund.
Finally, it’s important to make sure the fees associated with the fund are reasonable. It’s important to weigh up the costs and benefits of the fund, to make sure it's a good value for what you're paying.
Conclusion
Investment funds can be a great way to invest your money. They provide a ready-made portfolio with a professional manager making decisions on where to invest your money. However, it’s important to understand the different types of funds, how to evaluate their performance, and some key considerations when selecting a fund. By taking these steps, you can ensure that you select an appropriate fund that meets your investment objectives.