Cookie Policy

We use cookies on our website and have placed these on your computer. By continuing to use our website you consent to this. For more information, including how to change your cookie settings and to disable our non-essential Google Analytics cookies, please refer to our Cookie Policy. If you do not wish to be reminded of this on each visit, please use the close button.

How to select a fund

March 2019

Tags: First Time Investors

Selecting a fund or funds can seem overwhelming from the thousands to choose from, so here are some pointers to bear in mind from Georgette Harrison.

There is definitely some thinking to do before you get to the point of selecting the funds.


First ask yourself three key questions:

1. What are my investment goals? Are you planning to use dividends to provide an income, or are you looking to grow your capital? These decisions will often depend on which life stage you are at. Perhaps you want to supplement other retirement income or you are saving for a rainy day.

2. What is your attitude to risk? There is a trade-off between risk and reward; it is generally assumed that the more risk you are prepared to take, the higher the potential returns, whereas if you are very cautious with your investments, you can anticipate lower returns.

In other words, this is the ‘can you sleep easy’ test. Are you prepared to be more adventurous with your investments and are you happy to take a risk with the investment choices that you make, in the hope that you will make gains. If you feel uncomfortable with that thought, you probably sit at the cautious end of the spectrum. One sage piece of advice is don’t risk what you can’t afford to lose.

Click here to learn more about risk.

3. What is your time frame? Received wisdom is that the longer the time frame you have to hold your investments, the more risk you might be able to take on, as there is potentially opportunity to ride out some of the inevitable peaks and troughs of stock market performance.


The next step is to consider these points:


The old adage ‘Don’t put all your eggs in one basket’ holds true here. As you are selecting a fund, you will already have a level of diversification (as the fund will hold multiple individual company shares or different types of investment vehicle), however, it is important that you consider increasing this. Greater diversification should help reduce risk.

If you are invested in one particular sector which is impacted by events and the value of company shares in that sector falls, you are overly exposed to that risk. Whereas, if you have spread your investments across different sectors, you will have also spread your risk and reduced the impact of a sector underperforming.

Asset allocation

Add up all the assets you have across equities, fixed interest, property and cash and work out what the percentage split is to give you your ‘asset allocation’.

Think again about what your investment goals are and to what degree these are currently being met by your existing asset allocation. If there is scope for change to meet your objectives, the next step is to look at the different fund categories.

Subtract your age from 100 and the difference should be the percentage of your portfolio that you hold in equities.

Rule of thumb 

There’s an old rule of thumb which suggests you should subtract your age from 100 and the difference should be the percentage of your portfolio that you hold in equities.

For example, if you are 55, around 45% of your assets should be held in stocks and shares.

Now that people are living longer and need a greater accumulation of capital, it might be wiser to subtract from 110 or even 120. There is then longer to take advantage of the potentially higher returns that shares offer.


Fund categories

The Investment Association, the trade body that represents UK investment managers, splits funds into different sectors and most fund names will reflect the area or type of investment.

Reflecting what your investment goals might be, funds fall broadly into two categories; those that aim to produce income and those that aim for capital growth.

The next level of classification is the type of asset (e.g. shares, fixed income), geographic region or industry sector in which the fund invests.

Some funds sit in sectors focused on capital protection, such as money market funds, or are in the specialist category, and some choose to remain unclassified.

The targeted absolute return sector contains funds that aim to produce positive returns in all market conditions.

If you are starting out, you might want to consider a global fund, the ultimate in diversification, as this will give you broad exposure to different markets and you don’t have to make choices as to how to split your investments.

You may take the view that you want to stick closer to home, in which case one of the funds investing in the UK would be your first choice.

Generally speaking, the narrower the fund’s investment objective, the more specialist it is and therefore the less diversified.

Another aspect which it is worth considering is whether you would prefer to select a passive fund, like a tracker or Exchange Traded Fund (ETF). 

Passive or active management

Another aspect which it is worth considering is whether you would prefer to select a passive fund, like a tracker or Exchange Traded Fund (ETF), which follow an index or an actively managed fund, where the fund manager is making the decisions about which companies or investment vehicles to invest in. This is not necessarily an either-or choice. Following the diversification argument, you might choose to have a mix of passive and active funds in your portfolio.

Fund performance

Finally, the thorny issue of fund performance; you have an idea of which sectors you want to invest in, but there are usually many funds belonging to the same sector. Websites like FE Trustnet and Morningstar provide a wealth of information, including fact sheets on each of the funds, ratings and risk/return analysis.

If you are using an investment platform, this will also provide research and information on the different funds available. Some platforms also set up model portfolios, which can offer some good ideas on how to combine fund selections to achieve your investment goals.


Writer - Georgette Harrison 


Read Focus on Funds Magazine 


Fund Select List 

As there are thousands of funds available to investors, our Fund Select List is a useful tool to narrow down which might best suit your needs.

The list is compiled by Square Mile, an independent investment research business. It works in partnership with regulated professional financial services firms to develop informed investment recommendations.


View Fund Select List 


Focus on Funds

This article was featured in the first edition of Focus on Funds magazine.

The views and opinions expressed by the author, Focus on Funds magazine or associated third parties may not necessarily represent views expressed or reflected by Selftrade.

The content in Focus on Funds magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.

Focus on Funds Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA. 


Writer: Focus on Funds Tags: First Time Investors

Focus on Funds, brought to you by DIY Investor Magazine, is a publication dedicated to active investment management – unit trusts, OEICs and investment trusts.

You can start investing today through any of our account options:

Dealing Account

Access a wide range of global investments in this flexible, unrestricted account.

Find out more

Stocks and Shares ISA

Take advantage of tax free investing with our Stocks and Shares ISA today.

Self-Invested Personal Pension (SIPP)

From great value to best-in-class, access the SIPP to suit your needs through our extensive network of providers.

I've still got questions!

Our experts are on hand to help at our UK based Customer Experience Centre on 0345 0700 720

Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

If you have a Stocks and Shares ISA, make sure you get the best value for your investments. We are ranked top for price on large portfolios (Platforum, 2018).

Open an account today and we’ll cover any transfer fees up to £100.*

*T&Cs apply.

Open a Stocks & Shares ISA

Find out more