Beginner's guide to managed funds

If you want to try to beat the market, find out how to choose managed funds.

If you’re new to investing, we have always pointed you in the direction of index tracker funds. Index trackers are a low-cost way of gaining exposure to shares, and replicating stock market returns as closely as possible. This is known as passive investing.

But what if replicating the market isn’t enough. How should you invest your money if you want to try and beat it? 

There are hundreds of investment strategies to choose from, but you could think about putting some money in managed funds. This is known as active investing.

What is a managed fund?

A managed fund is run by a professional fund manager who picks shares or other assets with the aim of maximising the return for investors. Naturally, investors have to pay for the fund manager’s expertise. But these funds have often been criticised for charging well over the odds and underperforming the market.

How do I choose a good managed fund?

Not all funds should be tarred with the same brush, as some perform much better than others. So how do you choose the right one?

As a first-time investor it’s probably a good idea to stick to funds run by large, well-established fund managers who have a good reputation. You can find out more about the top fund managers from Trustnet.

Past performance

You should also review the long-term performance track record of any fund you’re interested in. This data is widely available, but again we like Trustnet. But, don’t forget, past performance is never a guarantee for the future.

Charges

You should also check the charges aren’t too high relative to similar funds. The cheapest isn’t necessarily the best, but if the initial charge and annual management charge are excessive they will drag the returns down.

You will also have to pay a service or platform fee if you are holding the funds via an investment platform such as Hargreaves Lansdown, Fidelity or BestInvest.

A recent regulatory change means that many platforms now offer what are known as 'clean' and 'super-clean' funds. These are basically funds which pay no commission from the fund provider to the platform. Financial advisers have had to offer these since January 2013.

If you're using a platform for your investments, be aware that some platforms also charge other fees. For more on these, have a read of our Beginner's guide to investment platforms.

Tax treatment

You can hold managed funds in a stocks & shares ISA and self-invested personal pension (SIPP) and not pay any Income Tax or Capital Gains Tax.

Free ISA guides

Is the fund right for me?

Finally, make sure the funds are suitable for you as an investor.

Many platforms have special or select lists of funds that they recommend, which they say are based on extensive research. That doesn't necessarily mean they are right for you.

For example, if you’re reasonably cautious in your attitude to risk, it’s probably a good idea to steer clear of funds which invest in emerging markets or specialist sectors.

You should only invest in managed funds if you’re prepared to hold onto them for at least five years. The stock market is a volatile place which isn’t suitable for a short-term punt if you’re a novice.

Compare stocks & shares ISAs

More on investing:

Beginner's guide to stocks & shares ISAs

Beginner's guide to index tracker funds

Beginner's guide to Exchange Traded Funds

Beginner's guide to bonds

Beginner's guide to investment trusts

How to invest in an IPO

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