How I choose the funds to invest in 💡

If you have decided to start your investment journey (well done for getting here👏), you may be wondering what funds to choose. This can sound like a huge task as there are so many different funds offered on various platforms.

When I first started I was seriously puzzled.

Vanguard currently offers 86 funds, while other investment platforms offer them in the thousands. Understandably, this can seem pretty overwhelming.

There is also a lot of information and financial jargon, which can be confusing at the start, but once you understand the basics, you should feel more confident in picking a fund.

Don’t forget - same principles apply on choosing a fund within your workplace pension and most providers will have similar options.

Here are 3 key things I look at when choosing a fund.

🧑‍💻 Management type: Passive vs Active Funds

To get the best returns I choose passive funds (also called index or tracker funds) over active ones. These are designed to track a certain market segment performance, for example S&P 500 (largest 500 US companies).

As they are not actively managed, they usually have low fees and better long term performance. Exactly what most investors want!

In fact, actively managed funds rarely outperform index funds. A recent study by Standard and Poor that looked at 2,132 actively managed funds discovered the following:

For the vast majority of investors index or tracker funds would be a great choice because of this.

🌎 Geographical region

I want a broad exposure to the stock market, which can be achieved through a global index fund.

Why global?

Because no one knows how certain countries’ stock markets will perform in the future. In the past century US has seen the best growth, but this could change in the next 30 years.

Investing in the whole stock market also offers great diversification as global funds invest in different countries, industries and companies. If one sector or country performs badly, the rest of the fund could help balance it out.

Examples of global/world index funds:

• Vanguard, FTSE Global All Cap

• AJ Bell, HSBC FTSE All-World

• Trading 212, Invesco FTSE All-World

My alternative choice would be global developed market funds, but these exclude emerging markets like India or Brazil.

💸 Income type / share class

The last thing I pick is whether a fund is accumulating or distributing. The accumulation funds reinvests any interest gained allowing your money to compound over the years.

This is what I choose for long term investing as I want to benefit from the compounding effect.

If I wanted to receive dividends, I would choose Income/Distributing funds. These are paid out regularly and would sit in cash in my investment account.

My weekly recommendation

A must watch video from James Shack on the new type of financial scam and how a couple paid their £75,000 house deposit to a scammer instead of their solicitor 😱.