Choosing Investment Funds and Shares can be a risky business. With fluctuations in the market never more apparent, it's time to look closely at your strategy for selecting investments. How do charges affect your decision, and how reliable is past performance of any fund you may choose?

Charges

The financial industry and the pricing of their products have become more scrutinised over the past few years. Charges and commissions now have to be disclosed at the point of sale and the customer is more informed of what the adviser should tell them.

Many products such as Unit Trusts and Investment Funds are still guilty of hidden charges, with many Unit Trusts having charges built into their price. This is called a Bid/Offer Spread and is reflected as a difference in price between the buying and selling price of each Unit held. This means if you were to buy and sell the Unit purchased on the same day, you would lose out. This Charge is normally around 5%. Due to the nature of how this charge is deducted, many consumers do not even realise that it has been taken. Most people do not buy and sell on the same day, so the longer you keep an investment, the more diluted this becomes.

Many financial advisers have access to special deals on Unit Trusts or will be in a position to reduce the charges on a transaction, by rebating their commission. This is especially appropriate on particularly large investments.

Low Charges should not be the overriding factor in selecting an investment, but should be a consideration. The amount that is deducted from the fund has a direct impact on the overall returns that you receive. 

Performance

'Past Performance May Not Be A Guide To Future Performance' is a common statement that many investors hear. The best performing fund this year may not be number one next year. It's natural for top investment providers to promote their strengths, and if this is in the form of good performance, then their marketing literature and advertisements will stress how wonderful this has been. However, you should be careful, as there is no standard way of displaying performance figures, and companies are very guilty of portraying the story as they see it.

You should look closely at any claims that are made and notice over what period the performance was registered. If the company is using a period of say three and a half years, you have the right to be sceptical. Most independent sources of information like Moneyfacts use 1, 3, 5 and 10 years past performance as a basis for comparison. If the company is using an 'odd' term then they may hand selecting a period of time to suit. 

Many of the performance tables are split into sectors, which all carry a theme. For example, if you have a sector that contains 100 funds that invest into European shares, you will be able to compare via a peer group. The positions are generally judged by Quartile positioning. So, a fund in the first 25 will be 'top' quartile and the last 'bottom' quartile. You should look for a fund that stands in the top quartile over say the last 3, 5 and 10 years. This would indicate that the fund is strong enough to perform in good, as well as bad times. Most funds would have had a change of manager in that time and this would also indicate that the results have not been due to the knowledge of one 'star' manager. For a fund to be successful for this duration of time the 'stock selection' procedures and processes within the company must be strong.

Ask The Experts

You could of course seek professional help. Many Independent Financial Advisers will have experience of the markets and of selecting successful Unit and Investment Trusts, however, I would question any 'expert' closely as to how they choose the investments. You've already had an insight into my thinking and methods. Not all advisers will share the same views, but their advice should have some kind of 'reasoning' and 'foundation'. If they're unable to demonstrate this to you, you should walk away and find someone who can. Remember that you will be paying for this advice through charges within the product or fees that you agree between you. It's only fair you should know how your money is going to be invested. 

Lastly you could always take the lead of one relatively successful investor last year. He dipped his six-month-old daughter's fingers in a bowl of water. Then handed her a copy his newspaper, open at the page listing Managed Funds. The first ten marks that she made on the page, he invested £1000. At the end of the year, the selections had performed in line with the average fund during the year.

Doesn't that make you think? 

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