How to pick an investment fund

Investment funds are one of the easiest and most effective ways to start investing. They let you pool your money into a ready-made mix of assets—such as stocks, bonds, or property—without needing to select and manage each investment yourself. But with so many options available, how do you choose the right one?

In this guide, we’ll walk you through the key fund types, explain the difference between active and passive management, and highlight the most important factors to consider when choosing a fund.

Step 1

Choose a Management Style

Actively Managed Funds

• Run by a professional manager who picks investments they believe will outperform the market

• Aim to beat the market, but usually come with higher fees

Passively Managed Funds (Index Funds)

• Track a market index like the FTSE 100 or S&P 500

• Aim to match, not beat, market performance

• Typically lower fees due to less day-to-day decision-making

Which is better? There’s little consistent evidence that active funds outperform passive ones over the long term. That’s why many investors start with low-cost passive funds. However, active funds can be useful in niche sectors like biotech or emerging markets, where specialist knowledge may provide an edge.

Tip: Start with passive funds as a core holding. Add active funds selectively if you want exposure to specialised areas.

Step 2

Pick a Fund Structure

Once you’ve decided on active vs. passive, it’s time to choose the fund type. Here are the four main options:

Mutual Funds (OEICs)

What they are: Mutual funds pool money from many investors to invest in a wide range of assets. They’re called “open-ended” because there’s no limit to how big they can grow. New shares are created when people invest, and cancelled when they withdraw.

Key features:

• Traded once per day (you get the end-of-day price)
• Often specialised (e.g. healthcare, green energy)

Good for: Hands-off, long-term investors

Investment Trusts

What they are: Investment trusts are closed-ended funds. They issue a fixed number of shares and are traded on the stock exchange like company shares. Prices move throughout the day based on demand. They are usually actively managed, but there are some passive ones too.

Key features:

• Traded in real time on the stock market
• Can borrow money (called "gearing") to boost returns
• May “smooth” income—saving profits in good years to maintain payouts in bad ones

Good for: Confident investors looking for income or sector opportunities

Exchange-Traded Funds (ETFs)

What they are: ETFs also pool investors’ money, like mutual funds, but they are traded on stock exchanges like shares. Many are passive, but ETFs can also be actively managed, depending on the product.

Key features:

• Buy and sell during market hours
• Low fees (especially passive ones)
• Wide range of themes: tech, commodities, ethical investing, regions, etc.

Good for: Flexible, cost-conscious investors

Alternative Investment Funds (AIFs)

What they are: These funds invest in non-traditional assets (e.g. hedge funds, private equity, real estate, commodities). They’re often complex, high-risk, and less liquid.

Key features:

• Use strategies like leverage or short-selling
• Often have higher fees and limited withdrawal options
• Not always available to regular investors

Good for: Experienced investors seeking higher returns

Now that you understand the different fund structures—Mutual Funds, Investment Trusts, ETFs, and Alternative Funds—you can start thinking about which suits your needs best.

• ETFs or Mutual Funds: Both are Great for long-term investing. You can select active or passive management. However, only ETFs Offer flexibility to trade throughout the day

• Investment Trusts: Best for income or sector-specific opportunities

• Alternative Funds: High risk, for experienced investors only

Step 3

Match the Strategy to Your Goal

Every fund has a purpose. Some aim for long-term growth, others generate regular income. Ask yourself: what is your goal?

GoalFund Types to ConsiderLong-term growthIndex funds, active equity fundsRegular incomeDividend-paying investment trusts, bond fundsCapital safetyGovernment bond funds, money market funds

Look for keywords like “Growth,” “Income,” or “Balanced” in fund names or factsheets.

Also consider your life stage:

• Younger investors: Focus on equity and growth funds (higher risk, higher reward)

• Older investors/retirees: Consider income funds or lower-risk options

Risk LevelExample FundsHighEmerging markets, tech ETFs, small-cap equityMediumGlobal index funds, multi-asset fundsLowGovernment bonds, short-duration bond funds

If you’re investing for 5+ years, you can generally afford more risk. If you’ll need the money sooner, prioritise capital preservation.

Step 4

Consider Themes and Diversification

Step 5: Think About Fund Themes

Is there a particular area you want to invest in? If no you might be best placed selecting a global fund, which will invest in a range of products accross the world. But if you have specific interests you might choose to invest in something more focussed e.g a Fund that just invests in healthcare or tech. Some key suggstions: 

• Ethics: ESG or sustainable funds that avoid fossil fuels or weapons

• Sectors: Tech, healthcare, real estate, etc.

• Regions: UK, US, Asia, emerging markets

These let you invest in what you care about or believe in.

At the same time its important to think about diversification. Its risky to put everything in one niche area. So you might want to invest in a range of funds that help diversify your portfolio: 

• Asset types (stocks, bonds, property)

• Regions (UK, global, emerging markets)

• Investment styles (growth vs. income)

Diversification helps reduce risk and smooth your returns over time. Example: A global index fund + a UK income fund + a tech ETF = a well-balanced starting portfolio.

Step 5

Check Fund Costs

Even small fees can eat into your returns over time.

Key costs to check:

• Ongoing Charges Figure (OCF): Total annual cost of the fund

• Management fees: Often higher for active funds

• Trading fees: Especially important for ETFs, which incur brokerage charges

Two similar funds can have very different costs, so always compare before choosing.

Rule of thumb: Passive funds are usually cheaper and a better fit for long-term investing.

Still not sure?

Start with a global index fund, available as a mutual fund or ETF. It offers:

• Broad diversification

• Low cost

• Simplicity

You can also check your investment platform for:

• Most popular or best-performing funds

• Top-rated ESG funds

• Thematic fund selections

And if in doubt, speak to a regulated financial adviser for personalised guidance.

Conclusion

Picking an investment fund doesn’t have to be complicated. Start by clarifying your goals, understand the different fund types, decide between active and passive, and always factor in cost, risk, and diversification.

Remember:

• Start simple

• Diversify across assets and regions

• Keep costs low

• Review your portfolio annually

With consistency and patience, you’ll be well on your way to building long-term financial success.