Recently, I have been in the process of choosing an investment fund for my own needs. Investment funds are a useful method of investing. They provide a simple, hands-off, and diversified method of investing that is attractive to passive and long-term investors.

If you have some money that is sitting in a savings account being slowly eaten away by inflation then it might make sense to consider investing the money in a fund.

Due to their popularity and ease of investing, there are many funds to choose from. But how do you know which one is right for you?

Just like with stocks, choosing the right investment fund is crucial.

To simplify this process for you, I have listed the 10 key things I look at before deciding which fund to invest my money in.

What is an investment fund?

Just quickly to recap, what is an investment fund?

An investment fund pools together different assets from different investors in one fund.

This fund then invests the assets.

For the investors, this has the benefit of access to a broad variety of investments across different asset classes, regions, sectors, and industries that could not be easily accessed as a single investor.

Moreover, as the fund takes care of the day-to-day management, it is a relatively hands-off investment choice.

10 things you need to look at when deciding on an investment fund

It’s important to know what you are looking at when evaluating a fund. Basing your decision on the shiny fund brochure won’t lead you down a good path.

Instead you need just need to know the 10 things to look out for in an investment fund.

By understanding these 10 criteria for choosing an investment fund, not only do you get a better picture of the funds real fit for you, but you are also able to easily compare different funds and choose the best one for you.

1.     Determine your personal investment profile

It is crucial to first define your investor profile before deciding on an investment fund.

What is your investor profile?

Most platforms and investment funds will require you to fill out a questionnaire that helps to determine your investor profile.

These cover your current financial sitution, your investment goals, risk tolerance, and your investment requirements.

Risk tolerance considers your capacity to bear market volatility in your investments, as well as your risk appetite and investment horizon.

It is important that you know your profile before deciding on an investment fund.

Neglecting this could result in taking risks that you do not have the financial capacity to bear or that are misaligned with your investment goals.

Therefore, take the time to define your investment profile.

Are you investing for the short-run, for example 1 -3 years? Or for the long-run?

Are you looking for a lower-risk investment or are you willing to take a higher risk?

These are crucial questions that you need to answer before you start choosing an investment fund.

2.     Fund style – actively managed funds or passively managed funds

The next thing to consider is the type of fund that you would like to invest in.

There are actively managed funds and passively managed funds.

In actively managed funds, the fund manager will try to out-perform the benchmark index.

In passively managed funds, the fund manager will try to reflect the index’s performance as closely as possible.

Actively managed funds try to out-perform the benchmark while actively managed funds try to replicate them as closely as possible.

However, active funds may also perform worse than the benchmark. In which case you are paying a higher fee for an actively managed fund that is underperforming.

In contrast, passively managed funds, such as index funds, do not try to out-perform the benchmark, instead, they aim to reflect the performance of the chosen benchmark.

These differences are important to know, as in one case it is possible to out-perform the market, and in the other case, it is not possible.

There is also a price difference.

Actively managed funds are more expensive than passively managed funds and some even charge a performance fee for when they do out-perform the market.

Choosing which style is best for you, depends on your goals and needs. If a high potential performance is important to you, then you may choose to invest in an actively managed fund.

If lower fees are important to you, then a passively managed fund may be the right choice.

3.     Which assets you want to invest in

Once you know the style of fund management that you want to invest in, you also need to know what type of investment fund you want to invest in.

Investment funds differ with regard to the asset classes, region, and industries that they invest in.

An investment fund may focus on just one asset class, for example, equities (shares), fixed income (bonds), real estate, commodities (e.g. gold), money markets, or some other alternative investments.

Then there are funds that invest in specific sectors, such as healthcare, or AI technology, or energy, or anther industry.

For normal investors, I recommend focusing on the asset allocation that you are looking for. Your investor profile also helps to determine which fund type is right for you.

The 3 most popular fund types that you will see are growth funds (majority equity), conservative funds (majority fixed income), and balanced funds (both equities and fixed income)

Equity funds

An equity fund will have a majority allocation of stocks in different companies. Equity funds differ in the percentage of the portfolio that is allocated to stocks but it can range from 50% – 90% or higher.

Equity funds are generally seen as offering the promise of a higher return but at a higher risk.

To identify whether the investment fund is an equity fund you can look at the asset allocation and at the percentage of equities in the portfolio. Another way is to look at the fund name, often equity funds are called ‘growth funds’.

Fixed-income funds

Fixed income funds have a majority allocation in government bonds and corporate debt. These are called fixed-income funds because the investments have a fixed dividend or interest payment that is paid out to the investors upon maturity.

Fixed income funds generally have lower returns but also lower risk. Unlike with equities, the payout is known in advance and the main risk is creditor default (avoid any bonds below a BBB rating, these are junk bonds).

To identify a fixed-income fund you can see the percentage of bonds and corporate debt in the portfolio or you can look at funds with ‘conservative’ in the name. These are a sign of a majority fixed-income fund.

Balanced funds

Another option is a ‘balanced’ fund.

A balanced fund will have both equities and fixed income in almost equal amounts. While an equity fund might be invested 80% in shares and 20% to fixed income, a balanced fund will have both bonds and shares at around 50% each.

Balanced funds are identified through their mixed allocation of almost equal percentages in equities and fixed income and the word ‘balanced’ is often in the name.

I often seen them as a sort of compromise option.

They promise a higher return than fixed income funds but they also present a lower risk than majority equity funds.

4.      Where the fund invests: geographic, sector, industry

As mentioned above, investment funds may also have a geographic focus, or a focus on a specific sector or industry.

Funds may have a geographic focus on entire regions such as emerging markets, or single countries like Switzerland or the US, others have no regional focus at all and invest in stocks worldwide.

It’s important not to confuse a regional focus with the funds’ domicile (we’ll come to that later).

The geographic focus is an important consideration of where you want to invest. If you know your home market well, you may invest in individual Swiss stocks on your own. But in order to invest in stocks across the world, you may choose an investment fund that invests worldwide.

Emerging markets are an interesting investment opportunity but they require a heightened level of due diligence and carry high transaction costs. Therefore, choosing to invest with an investment fund may be a easier and more efficient method to invest in this region rather than going it alone.

Other people are more interested in specific sectors or industries.

In this case, you can also choose investment funds that focus on those industries in which you would like to invest in.

For example, if you are interested in renewable energy such as solar and hydropower, you can find an investment fund that focuses on the renewable energy sector.

These are examples of more specialized funds, however, the largest and most common funds will usually either have a home bias or a global / US focus and invest across different sectors and industries.

5.     Distributing or accumulating funds

An important factor to know is how the fund pays out its annual return.

There are two primary ways that funds pay out their annual return.

First, there are distributing funds.

These funds pay out a return as an interest or dividend payment.

Second, there are accumulating funds, sometimes also called capital appreciation funds.

These funds reinvest the return made back into the fund. Thus, the invested capital accumulates.

The decision on which form is best for you depends on your profile. If you rely on the investment fund to finance parts of your life, for example, your retirement, then a distributing fund may be right for you.

However, if you are happy to leave the fund alone and do not need access to the capital, then an accumulating fund may be right for you.

6.     Fund currency

The currency of the fund is also a factor to consider.

Just because a fund is based in Switzerland, does not mean that the funds currency will be CHF.

Investment funds may choose to invest in CHF, USD, EURO, NOK, or any other currency.

The fund currency is an important part of your decision as it can affect both the cost of investing with the fund and the performance of the fund.

In some cases, investing in a fund which uses a foreign currency can positively affect your performance.

For example, take a fund that invests in US equities. In the scenario where US shares have gone up and the US dollar has appreciated against the Swiss Franc, then you will have a double benefit to your investment due to the appreciation of both the shares and the USD.

As the fund pays out in USD you will profit from the appreciation of the USD against the CHF.

However, naturally, this can also go the other way, where you lose more due to the appreciation of the CHF against the fund’s currency.

For this reason, some funds offer a ‘hedged’ option. Funds that hedge the currency risk are aiming to minimise the effect of currency fluctuations on their portfolio.

However, hedging is also relatively expensive. Currency fluctuations are notoriously hard to predict and hedging is imperfect, especially in the long run.

7.     Fund domicile

As mentioned above, the domicile of the fund should not be confused with the geographic investment focus of the fund. Nor does the domicile necessarily align with the home base of the bank or the financial provider with whom you are investing in the fund.

For example even if your bank is UBS, it is quite likely that the fund is domiciled in Luxembourg.

The domicile is primarily a tax and regulatory matter. You will notice that many Swiss funds are domiciled in Luxembourg. This is for tax reasons.

Swiss domiciled funds have to pay a high withholding tax while other European locations, such as Luxembourg, do not levy such a tax.

For the most part, the choice of domicile is largely the concern of the fund managers, however, you should still note the domicile location.

For example, investing in a US domicile funds can be quite problematic for non-US citizens.

The IRS is infamous for chasing down US citizens worldwide to pay their taxes but even as a non-citizen you risk falling under IRS rules if you invest in US-domiciled funds.

If you invest in such a fund, you become subject to both US withholding taxation and the US estate tax.

For this reason, although the fund domicile is often overlooked, I recommend checking where your fund is legally located.

8.     Fund performance

Ok, so everyone has read and seen the disclaimer that “past performance is no guarantee of future results”.

And yes, while this is true it’s also frustrating sometimes to read this as an investor. Because what does everyone judge investment on?

The performance!

So yes, while this disclaimer does stand, performance will naturally have an influence on your choice of fund.

However, you should definitely not just choose the fund with the highest performance.

Instead, look at the performance compared to the benchmark and the major indexes. How does the funds’ performance compare?

If it is an actively managed fund, did it outperform the index (and what was the performance after fees)?

If it is an passively managed fund, how well did it reflect the benchmark index?

You can also look at how volatile the fund was. A red flag can be a fund with a volatile performance with significant fluctuations from year to year.

Also look at the fund turnover, as this can create costs and tax liabilities for the investors.

Therefore, while past performance does not reflect future performance, it does offer relevant insights into the funds’ performance.

When evaluating funds according to their performance be careful to compare similar funds with one another. Do not compare the performance of a majority equity fund with a fixed income fund.

9. Cost and investment fees

One of the most important abbreviations that you need to know when choosing an investment fund is TER.

What is TER?

TER is the total expense ratio. This includes all the fees that you will be charged for investing in a particular fund.

Pay careful attention to the fees and the language that the investment prospectus uses to avoid having your portfolio gains be eaten away by high fees.

Sometimes funds will list a ‘fund fee’ but this may only be the management fee that is charged for investing in the fund and does not include other expenses.

This is why you need to look for the TER in the fact sheet to find out the total cost.

As mentioned above, passively managed funds are typically cheaper than actively managed funds. For such a fund a TER of 0.2% or less is good.

Actively managed funds tend to more expensive at around 1 – 1.5%.

You also need to be careful with actively managed funds as some funds will also charge a performance fee if they perform well against their benchmark.

Not only do high fees reduce the total gains you make from a good performance but what often goes forgotten is that even if the fund has a poor performance, you will have the pay the fee.

So, pay close attention to the fund fees. They can have a much bigger effect on total performance than you think!

10. Reputation and Service Quality

Reputation and service quality are two criteria that are often not mentioned. However, in my opinion, they are exceedingly important.

Firstly, reputation.

Particularly with managed funds, what you are investing in, is the fund managers talent and expertise in choosing the right investments. A fund manager who builds up a good reputation will attract people to his fund.

However, many times people forget to check if the fund manager who is responsible for the high performance is still managing the fund.

Check who is responsible for the fund, how long they have been around, and if they have an established reputation.

Secondly, service quality.

Often when investing in a fund, you are investing a significant proportion of your money.

For this reason, I think it is crucial that the service you receive from your fund provider is of a high quality.

I evaluate this from the first email I have with the fund. How responsive are they? How adept are they at handling your questions?

Also consider how long the onboarding process to invest in the fund is and how long it takes until your money is in the fund.

Chances are, that it will take about the same amount of time, or longer, to withdraw your money as when you wanted to invest.

For these reasons, I consider these two aspects just as important as the other more technical factors.

And with these 10 things to watch out for, I leave you to choose the right investment fund for yourself.

Are there any other factors that you look at before investing? Let me know if the comments below!