13 Fund selection methodology


For a great many retail investors, the key to successful investing in the stock market is to be invested in good funds.

In Chapter 12, we have seen that there are many funds that consistently beat the index, sometimes by quite a lot and over long periods of time – a decade and more.  It is not difficult to identify these funds and then to make a useful assessment of them.  By investing in such funds, you get an experienced professional team working for you.  However, we don’t want to be like lemmings jumping into hot funds just as they are cooling off.  We need to identify funds with good upside potential and have a strategy for building and monitoring a portfolio.  You shouldn’t just pick some funds that have performed well and invest in them in isolation from what is going on in the markets.


The previous chapters have sought to set the framework for a successful investment strategy.   When you have read Chapter 18 – Managing your portfolio, you should have a view on how much money you are prepared to invest in the stock market and how it should be split between individual shares and funds.

You should also have a view on the state of the market and what percent invested (PCI) you are comfortable with.  If you already have a portfolio, you could take a view on your PCI.  If the markets are testing highs and there are some tail risks in the air, it might be a good time to take some profit or get out of some poorly performing investments.  If the markets have just been through a serious pullback and you expect a strong recovery, then you might want to get some money into the market quickly, and funds are a good way of achieving this.

So, which funds?  You need to take a view on the balance that you want between income and growth shares.  If you want the comfort of regular income from dividends, then focus on income funds, but make sure you check the total returns that they have been achieving.  Alternatively, you may take the view that growth funds are a better bet and you may be content to sell some units from time to time if you need some income.  Or, you may want a portfolio containing a blend of income and growth funds.  The fund fact sheet or market information websites such as […]