Picking winners

The question of what managed fund you should invest in depends on a whole raft of personal conditions.

These include the level of risk you can tolerate, the time horizon of your investment and more specific questions such as what and where you would like to invest - for example, company shares or property, New Zealand or international, growth or defensive?

In doing this you will ensure that the managed fund you invest in best fits your investment style and goals.

In depth information on the investment style, mix, risk profile and other important information about individual funds is available in respective investment statements - many of which can be downloaded through the FundSource website (click on link at end of this story).

Consider risk

Returns may vary, but funds that are risky tend to stay risky.

A potential investor should examine the source of performance in a fund before committing to the investment. For example, high returns may have been made from a highly speculative asset, sector or country, but what the investor must ask is how sustainable that particular investment is.

An investor investing in technology last year, for example, based on previous returns, will have found their money evaporating ever since.

It is important to remember that past performances are no guarantee of future returns.

Look for consistency in management

For a fund to fit into a diversified portfolio, it is important that the fund's manager sticks to a particular investing style. This reduces the inherent risk in a managed fund by trying to control volatility and provide consistent results to investors.

Analyse performance relative to peers

When examining a fund's performance, you should look at its long-term record (at least three to five years) versus that of other funds in the same category.

You should also compare fund performance to the fund sector averages - for example, you can't really fault the manager of an Asian-based fund for poor performance in a year where all Asian funds performed badly, as they did during the Asian crisis in 1998.

However, it is harder to be forgiving if a fund performs worse than its peers do.

Opt for low expenses

Fund expenses directly reduce your returns, so you'll increase your odds of success by avoiding funds with bloated expense ratios - that's the fund's total annual costs, divided by the dollar value of your investment.

FundSource will not recommend funds where: entry fees are above 6 per cent, exit fees are above 1 per cent, the fund has a plan fee or the fund's management costs are above those of funds in the same category.

- FundSource Research

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