Key Questions To Ask Before Buying A Fund
Choosing an investment fund to buy can be a difficult task with such a bamboozling variety of funds available. There are funds that allow you to invest in solar power companies, far-flung countries like Thailand and inner-city skyscrapers. Choice But with all that choice comes confusion - many investors are unsure whether they are picking the right type of fund for their needs. One of the first questions a financial adviser will ask is "What's your time frame?" In other words, how long do you plan to hold the investment. Some people buy funds because they are savings up for a specific goal such as a wedding, or their children's education. Others want to live on the income from their investments and are hoping for a better return than the banks will give them. While some people simply have some spare cash they want to squirrel away for a rainy day. Questions But like all things, if you know where you are going, you are more likely to get there. That's why it's important to ask yourself a lot of questions before you get started such as "Is this money I'm likely to need in the next five years?" and "How will I feel if value of the investment suddenly falls 20 percent? Appetite for risk This will give you an idea of whether you are likely to be comfortable with some of the riskier funds, such as those that invest in emerging countries like Thailand, or whether you are after something a bit safer. Compare Shares Dealing Accounts
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So What Are The Risks Cash Generally, cash in the bank is seen as the safest type of investment and some funds try to mimic this by offering ‘guarantees’ that you will get your money back in exchange for a relatively low return. Bonds The next step up in the risk is usually the bond market. Investing in UK government gilts is very safe but returns tend to be only a little higher than cash, so many funds offer to increase this return in exchange for greater risks. For example, they may invest in bonds from the government of different countries. These can give much higher returns but the fund then starts to act a bit like stock market fund that rises and falls and can lose money Property Property funds have become much more popular recently because they can offer quite high-income returns. These usually invest in commercial property such as office blocks, warehouses and shops. Unfortunately many of these funds cannot be put into an ISA, so can be less tax effective. There have also been problems getting money out of them in the past when the property market crashed but most of these issues have been resolved now. Property funds can also offer some growth as well as income, though most of the return is likely to come from income and growth rates historically have not been high as for stock market funds. Shares Stock market funds are higher risk, so investors have to be prepared to lock their money away for about 10 years or more. The riskier the fund, the more time it needs. Within stock market funds there is a wide variety of choice from funds that only invest in biotechnology companies to those that track the entire FTSE all share index.
Key Questions To Ask Before Buying A Fund: 1. What are the underlying investments? - are you buying a fund that invests in bonds, shares, property, cash, or a mixture of all four? Some so-called income funds will own predominately bonds but also hold some stocks for their individuals. 2. If it is a stock market fund – how many companies are held? The fewer stocks held, the higher the risk, but there is also potentially a higher return. Traditionally, funds hold around 60-80 stocks but there is a current trend towards holding 40 or even 20. 3. How much risk is the manager taking? A bond fund may hold a majority of the money in a low-risk AAA-rated bonds issued by the UK government or blue-chip companies. Others may promise a higher return by investing in junk bonds or other sub-investment grade bonds. 4. Is the fund aiming to provide a high-income return or high growth? Make sure you have the right fund for your needs. Analysts say there is little point buying a very low risk bond fund if you don’t need the income now and plan to hold on to the investment for 10 years or more. 5. What is the management style? Some funds, such as trackers, are ‘passively managed’. This means the fund may, for example, invest in the top 100 stocks on the FTSE100 and not try to pick and choose which is the best company. Your investment returns should follow closely with how the FTSE 100 index performs. Other funds are ‘actively managed’ where an expert tries to pick which companies will provide the best returns and beat the index. 6. How big is the fund? Some older more established funds now manage a very large amount of money. They are often well liked by investors because they have had time to build up a reputation and may have a very good fund manager at the helm. However, there is an argument that having lots of money makes it harder to achieve high returns so investors should be aware of this. 7. Is the fund an investment trust, listed on the stock exchange, or a unit trust that is unlisted? There are quite a lot of differences between unit trusts and investment trusts that are explained below. Also check that the fund is an onshore fund that is regulated by the Financial Services Authority. That way you will have more protection if something goes wrong. |