When looking to buy your first fund there is a whole host of information out there available to choose from including books, guides and financial advisers to help you decide what is right for you.
In this article, FE Trustnet rounds up industry experts and asks what advice they would give to someone looking to buy a fund for the first time.
The topics covered below include analysing a fund’s performance and its manager while also looking at fund charges and deciding whether you should invest in an active or a passive fund.
Keep it simple
The first thing to say is don’t try to find next year’s blockbuster fund because that’s pretty much impossible, said Charles Stanley Direct pensions and investments analyst Rob Morgan.
He said that because there are thousands of funds to choose from, it’s a case of trying to stack the odds in your favour.
“Don't pick dozens of different esoteric funds. One or a small selection of decent, broad-based funds will do fine when you are first starting out,” he said.
Indeed, most first-time investors tend to start out with a small amount of money to invest, so investing in a “one-stop shop” fund is a good idea, noted Tilney managing director Jason Hollands (pictured).
He said this would likely be a fund that invests in a range of different asset classes or regions and is likely to be a better option for first time investors than trying to cherry pick a single strategy, region or building a portfolio of multiple funds.
Know what the fund is investing in
It may sound simple, but make sure you know what the fund is investing in, said Adrian Lowcock, head of personal investing at Willis Owen.
“Whilst this is sometimes hinted at in the name of the fund it is not always clear,” he said.
“For example, Old Mutual UK Alpha – the name suggests it invests in the UK but it doesn’t give you much more information than that.
“So, you need to check if it’s investing in UK equities, bonds or something else in the UK. If it is equities, as in this example, is it large, mid or smaller companies?”
Active or passive?
Many funds are run by managers who make investment decisions themselves and are supported by a team of analysts and are known as ‘active’.
Example passive fund tracking FTSE 100 index over 3yrs
Source: FE Analytics
Others, however, don’t have managers making these decisions and are known as ‘passive’ funds, which have become increasingly popular with investors in recent years.
Either may be suitable for an investor but for those focusing on actively-managed funds, the below two points are particularly important.
Don’t rely on a fund’s past performance
One of the first things people generally look at when analysing a fund is its past performance, and this is no surprise. A fund that has performed badly in the past five years isn’t going to turn many heads.
However, managing director of Chelsea Financial Services Darius McDermott said that a fund’s past performance should not be relied on.
“Yes, a long-term track record of strong returns can be a good sign, but there is never any guarantee a fund will continue to do well in the future,” he said.
“It may be a fund that performs particularly well in one type of market, but not others.”
The fund’s manager is important
Willis Owen’s Lowcock added that when you are looking at a fund’s past performance, make sure it is relevant to the current manager of the fund.
“Managers have a lot of influence over the performance of a fund and how it is run so make sure the performance is attributed to the existing manager and not a predecessor,” he said.
Another factor to consider when looking at fund managers is their support base and the resources available to them, according to Chelsea’s McDermott.
Do they have a lot of analysts working with them, do they use their own research, or do they use external research?
McDermott also said to consider whether the manager has managed money in different market conditions ie. in both up and down markets, also known as bull and bear markets.
Performance of global equity markets during full market cycle
Source: FE Analytics
If you are investing during a bear market and a manager you’re considering only has experience managing a fund in a bull market, this is something to take into account.
Costs and charges
Funds and fund managers earn money through charging investors in their fund a proportion of the assets under management (AUM) of the fund.
So, a fund that has a size of £1bn will earn a lot more money than a fund with an AUM figure of £100m, provided they have the same annual charge.
The annual charge is called an annual management charge (AMC), but sometimes you may only see an ongoing charges figure (OCF). The OCF encompasses the AMC plus other administration or regulatory fees.
Fund charges are a hot topic in the investment world and many managers have come under scrutiny over the high costs they charge investors.
McDermott said costs are an important consideration of choosing a fund because they have an effect on the total return of the fund.
When you use a platform that allows you to chart fund performance, the performance you see will already have the fund fees deducted from it so it is often difficult to see how well a fund has performed before fees are deducted.
Although choosing a fund with a low fee is preferable, McDermott said you should never choose a fund because it has the lowest costs.
“Returns after costs are arguably much more important,” he said. “It’s better to pay a little more for a fund that should perform better over the long term, rather than pay less, but for a fund that under-performs.”
Charles Stanley Direct’s Morgan added that fees are one reason passive vehicles have grown in popularity in recent years.
“Passive funds or “trackers” are a simple option to reduce the impact of charges on your returns,” he said.
“These aim to replicate the performance of a particular market, for instance the FTSE 100, and because there is no fund manager or team employed to make stock selection decisions they usually come with lower costs.”
Which share class to pick?
Finally, when it comes time to buy your first fund you may see several options of the same fund, called share classes or units. Examples are ‘A Acc’ or ‘B Inc’ and these will appear next to the name of the fund.
Anything with ‘Inc’ at the end (which stands for income) will pay out any gains the fund makes to you, and anything with ‘Acc’ (accumulation) will reinvest the gains into more of the fund’s units.
Willis Owen’s Lowcock (pictured) said that for simplicity sake, if you need the income from the investment, choose ‘Inc’, otherwise it doesn’t much matter. 
He added: “Some funds won’t have the choice. In addition, there are classes of funds either to denote a currency or other characteristics. This is easy to get mixed up and make a wrong decision so call your investment firm up for guidance to be sure you have the right one.”
So you’ve found a fund – now what?
When you have found the fund or funds that you would like to invest in, don’t worry about picking the right time to invest, said Charles Stanley Direct’s Morgan. Instead, he advised that making regular deposits are the best option.
“No-one can pinpoint exactly the right moment to put money in the market. Instead, don’t even bother thinking about whether the market is high or low,” he said.
“Monthly savings by direct debit from your bank can be a great way of combating stock market volatility.
“You’ll be averaging your purchase price over time, so dips in the market, particularly in the early years, could even work to your advantage.”
Morgan said if you keep doing this over the long term (10+ years), then the ups and downs of markets should provide you with less concern.
“Time and patience are your greatest allies; you may be amazed how monthly savings coupled with good investment returns can build a sizable nest egg over time,” he added.
You can change funds if you’re not happy
Once you have bought your fund or funds, Morgan advised to monitor your investment to see how they are getting on against their peers.
Although the typical holding period for a fund is several years, you can always sell your fund earlier and buy another if you’re not happy with it.