How to choose a fund to invest in
12 April 2021
If you’re investing in exchange-traded funds (ETFs) for the first time, you might feel a bit spoiled for choice. With so many to choose from, the whole process may seem overwhelming at first—but don’t worry! Here’s some points you might consider.
Risks and rewards
Risks and rewards can be connected. Investments that have a higher chance of delivering higher returns also tend to come with a higher chance of not delivering those returns, or even losing money. Investments that deliver lower returns may come with more certainty, and a lower chance of losing money.
If you want higher returns, you might need to be willing to accept less certainty. On the other hand, if you’re looking for more certainty, you may need to accept lower returns.
For example, when your money is in your chequing account, it earns a very low interest rate.
But if you take that same money, and buy some bonds with a B- rating (indicating that the rating agencies think they are less likely to be paid back than bonds with a AAA rating), you may get paid a higher interest rate (this is called a coupon—but it’s fundamentally the same as an interest rate).
This is because the bank’s chequing account offers more certainty than the relatively low-rated bond. So the bond issuer is compensating you for that lack of certainty by paying you a higher interest rate.
Think about this same concept when you’re investing in funds. Some funds may pay higher returns over time, while also going up or down in the meantime. When you invest in these funds, you’re accepting the ups and downs in exchange for a shot at the higher long-term returns.
One of the ways to figure out how much risk to take is to look at your time horizon.
A ‘time horizon’ is a fancy way to describe a timeframe. It’s the amount of time you expect to keep your money invested in a particular investment.
This doesn’t need to be exact. But you should know whether you’re going to want your money in a week, a month, a year, a decade or more.
If you're going to need, or likely to want your money soon, you may choose to avoid riskier funds. Riskier funds tend to go up and down in the short run. They may also recover any value they lose in the long run or lose value in the long run. You may want to consider your time horizon when working out what level of risk you are willing to bear.
So that’s really it: risk and time are two elements you may consider when you’re investing in funds. If you’re interested in investing in companies, check out our blog about how to choose a company to invest in.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.