To make gains you need to understand there is a risk you will lose some, or even all, of your money, and this risk grows in line with the size of returns you are aiming for.
Given this is the case, a fund that generates a higher gain from a lower risk – or generates better returns per "unit" of risk, is preferable.
The Sharpe ratio relates the returns a fund makes over a benchmark to its volatility, providing a measure that expresses how much value a manager has managed to squeeze out for the risk they took on.
FE Trustnet takes a look at the funds with the highest Sharpe ratio in their sector, indicating they offer a better risk/return trade-off than their peers.
IMA Global Emerging Markets
While the three best funds in terms of Sharpe ratio in this sector are all run by emerging markets leader First State Investments, all of these are closed to new investment.
The next best thing in the risk/return stakes is McInroy & Wood Emerging Markets.
This fund, which has five FE Crowns, is little-known among investors and advisers as it receives minimal marketing. For this reason it is only £45.4m in size, despite a long track record of top-quartile performance.
The fund has made 86.48 per cent over the last five years while the average retail emerging markets fund has made just 28.19 per cent, according to data from FE Analytics.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Its Sharpe ratio over that time is 0.65, according to data from FE Analytics, while its annualised volatility of 14.37 per cent is among the lowest in the sector.
The four best-performing portfolios on a risk-adjusted basis in the sector all have a top-quartile figure for the lowest possible maximum drawdown – the most an investor could have lost by buying and selling at the worst possible moments – and a bottom-quartile maximum gain.
They are also the four best-performing portfolios in terms of total return over the period, suggesting that a cautious style in emerging markets can pay off.
Unfortunately, the fund requires an initial investment of £10,000, which may be another reason why it has not grown by as much as some of its peers. The total expense ratio (TER) is 1.69 per cent.
IMA Sterling Strategic Bond
Jupiter Strategic Bond
Funds in this sector can invest in any sterling-denominated bond, corporate or government.
FE Alpha Manager Ariel Bezalel has run Jupiter Strategic Bond since it was launched in June 2008, since when it has become one of the most popular funds in the sector.
According to data from FE Analytics it has the highest Sharpe ratio of any Sterling Strategic Bond fund over the past three years: 1.62.
It takes iBoxx Sterling Non-Gilts as its benchmark, and FE Analytics data shows that its returns of 31.14 per cent are marginally ahead of the index's 28.59 per cent.
Performance of fund vs index over 3yrs
Source: FE Analytics
The fund is yielding 5.7 per cent, is available with a minimum initial investment of £500 and has a TER of 1.51 per cent.
Ecclesiastical Amity Sterling Bond
Also worth a mention is the Ecclesiastical Amity Sterling Bond fund, which is second in the sector, with a Sharpe ratio of 1.53.
This £54.5m portfolio is run by FE Alpha Manager Robin Hepworth alongside Chris Hiorns.
It only invests in bonds issued by institutions it thinks make a positive contribution to society and the environment.
It is currently yielding an impressive 5.38 per cent, according to FE Analytics.
Total returns of 25.53 per cent over three years put it in the second quartile of the sector, ahead of the average fund.
It is available with a minimum initial investment of just £200 and has a TER of 1.39 per cent.
IMA Absolute Return
CF Odey UK Absolute Return
This fund is run by James Hanbury and Jamie Grimston, but its holdings bear the imprint of hedge fund star Crispin Odey.
The fund has a large position in Sky Deutschland, which is currently a loss-making business attempting to make headway in a new market.
It uses derivatives to take advantage of stocks that fall in value as well as those that grow, and to create positive returns in all conditions.
So far it has achieved this, making investors money in each of the four calendar years since it was launched.
According to FE Analytics data, it has the best Sharpe ratio of any fund in the IMA Absolute Return sector over the past three years, at 1.35.
Its returns of 78.43 per cent over this time are more than twice those of the second-placed fund in the sector.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
The fund requires a steep minimum initial investment of £5,000 and has a TER of 1.47 per cent. It has a performance fee of 20 per cent of net gains on a weighted average basis.
IMA North America
GAM North American Growth
This five crown-rated fund is the standout portfolio in the IMA North America sector.
In a sector where it is rare for active managers to outperform the index, FE Alpha Manager Gordon Grender has been doing that since 1985, when he started running the fund.
GAM North American Growth is the best performer in its sector over three and five years.
Its returns of 108.91 per cent over the last half-decade are more than twice those of the sector average.
Performance of fund vs sector over 3yrs
Source: FE Analytics
It has the highest Sharpe ratio of any fund in the sector over the past three years, at 0.75.
It has returned 54.27 per cent over this time, while its S&P 500 benchmark has made 19.84 per cent.
The fund requires a minimum initial investment of £6,000 and has a TER of 1.57 per cent.