July 22, 2014

Investing in a fund: how to

Thinking of investing in a fund? This how to guide will explain how to invest or buy a fund of your choice and key things to look out for.

Going it alone with a discount broker

So you’ve decided to go it alone and you don’t require the help of a financial advisor, now when it comes to investing in a fund, it’s most cost-effective to use a discount broker. There are a whole host of discount brokers or ‘fund supermarkets’ around, and many partially or fully discount the typical 5% ‘initial charge’ for investing in a fund.

Opening an account and investing in a fund

So you’ve decided on the broker you wish to use to invest in a fund, now comes the time to open an account with your broker of choice. Most will allow you to open an account online via an application form. You can also elect to invest in a fund through a tax efficient ISA wrapper or open up a regular share account.

Selecting a fund to invest in

Most broker websites will contain links to fact-sheets where you can view fund updates from the fund managers and understand its key holdings. Some brokers also provide free research from their own team of analysts which may help your decision. However, it must be acknowledged that third party research should be not treated as any form of ‘guarantee’ when it comes to investing – they should be taken with a pinch of salt, and you should be totally confident in your own investment decisions.

When investing in a fund, you should take into your attitude to risk and purposes for investing. There are a whole variety of fund sectors including equity and fixed income. If you were looking for good dividend payouts in light of low interest rates as opposed to out and out growth, then fixed income funds may be more suitable for your situation. Likewise, emerging market funds offer the potential for greater returns but are associated with a great deal of risk due to economic and political uncertainty generally.

Understand the costs of investing in a fund

You should also understand the costs of investing in a fund to understand the potential for your returns. While most brokers will discount the initial charge of a fund, all funds are typically associated with an annual management charge in the region of 1.5%. Some provides may pay some of this charge back to you, but not all.

Knowing when to sell a fund

Funds are designed for long-term investors and a minimum of five years. However, you may continue to be unhappy with the performance of a fund, have lost faith in the fund manager or your attitude to risk has changed.

At these situations and after careful consideration, you may wish to consider selling your investment in a fund.

If you feel that you do not have the required degree of knowledge to invest in the right fund or have the time to manage your portfolio, then seeking the help of an independent financial advisor may be a good option.