Posted on: 20th September 2019
You will find that the majority of defined contributionschemes offer various funds. The number of funds offered by a scheme could be anything from merely a few to a few hundred. Some schemes, such as a self-invested personal pension, may offer greater freedom.
How do I choose which funds to invest in?
Your pension provider should offer information regarding your available fund options and each fund should be provided on a detailed fund fact sheet. Before investing in a fund, you should receive a Key Investor Information Document (KIID), which explains theobjectives, charges and other information about the fund.
Types of funds
There are numerousfunds available in the UK that come with a variety of options, from asset type to risk adjustment. These options can be managed on an active basis, where the fund manager makes the decision, or a passive basis, where the fund tracks the relevant index.
The aim of anyfund is to produce medium to long term returns. However, the assets that a particular fund invests in will determine the risks of the fund. When investing funds into high-risk assets, they have the potential to produce higher returns. However, due to the volatility of the market, they may also lose value.
When comparing funds that are similar, be sure to check the charges. These act as a drag on fund performance and the higher the charges, the bigger the impact. A good fund manager, however, may justify these charges by achieving greater performance. And although you may want to look at past performance as a guide, this may not determine future performance.
Investing in multiple funds
Many pension schemes allow you to invest in numerous funds, though there may be a cap on this. It is usually considered wise to invest in several as you won’t then rely on the performance of merely one single asset. Investing in numerous funds means that your risks are spread and is known as “diversification”. However, this type ofcan also increase the risk, so be sure to carefully consider your options.
Building a portfolio
If you choose to invest in multiple funds, you will begin to build a portfolio of investments. These will grow at different rates and, over time, those growing at a higher rate will begin to represent a higher percentage of your overall investments. As a result, the risk profile may change.
To avoid this, be sure to review yourportfolio regularly and consider switching some of the higher risk assets into different funds. This will bring your portfolio’s overall asset allocation back to where you initially invested. Again, as the conditions of the market may change, you may need to review your funds to see if they still suit your needs.
Choosing and managing your funds with
If you need help with choosing funds and managing a portfolio, it is always wise to speak with an independent financial adviser. At Haven IFA, we are here to ensure everything you invest is done so with your future in mind. To learn more about our services, get in touch.