Saving for Retirement – Choosing Investment Funds

As we saw last time, there are a vast number of investment funds to choose from. Here are some things you should think about when you choose which ones you should invest your money in to:


  • What level of risk are you comfortable taking with your money?

Each Fund has a different level of risk associated with it. As we’ve already discussed, bonds are regarded as relatively low risk as their prices don’t go up and down as much as shares. Equities (shares) are regarded as riskier as share prices can be quite volatile with potential for larger rises but also larger falls. Within the different types of share funds some are regarded as higher risk than others. For example technology shares are higher risk than UK Income generating shares.

Risk and reward are usually linked: Low risk; low reward, higher risk, higher reward.


  • How long will you be investing for?

If you are 25 years from retirement you should be able to take a higher risk and be investing for growth. If share prices fall one year it may not matter so much as you’d still have 20+ years to build up again. However if markets were to fall 2 years before retirement this could have a big impact on how much you can retire on. Generally if you have a time horizon of more than 5 years and definitely over 10 years investing more in share based funds is fine.


  • Are you investing for growth – usually the case when you are building your pension?

Or, are you investing for income from your investment – usually the case when you reach retirement. Or, you may want a mixture of both. Some funds specify clearly whether they are growth or income based funds. Others may not be so obvious.


  • If you want to have a go at picking your own choice of funds, why not pick funds you’re interested in. If you’re interested in an area or an industry that you invest in you’ll probably feel more affinity with your pension money.


  • If you want to choose individual funds it’s usually an idea to choose 3 or more to spread the risk. This is called ‘diversification’. You want to spread the risk but not have so many funds that even if one doubles it wouldn’t make any difference to you.


  • If you’re not sure and you don’t want to decide, you could invest in just one fund that gives you a mix of shares and bonds and cash, and maybe even some property. They might also have shares and bonds both in the UK and internationally. These are known as Multi-Asset funds. They could also be called a Managed Fund or a Balanced Fund.


  • If you don’t choose, you will usually be invested in a DEFAULT fund. This will be a fund designed to be appropriate to as broad a range of people as possible.

They are often a type of ‘Lifestyle’ fund. Lifestyle Funds shift from riskier but higher growth assets such as shares, towards less risky assets (such as bonds and cash) as you get closer to retirement.


  • Try to keep costs low. The cost of any fund has a direct impact on your return. The higher the cost the less is potentially coming to you. However, you should look at the cost of the fund in the context of what it has delivered in the way of performance over the years. If performance has been strong and consistent it may be worth paying the higher charges. All funds should show their total cost not just the annual management charge.
  • One way to keep costs low is to invest in Passive Funds or ‘Trackers’. Active fund managers attempt to perform better than any given index but tend to charge a higher fee to do so. They don’t always succeed. Passive funds merely aim to track an index and are usually much lower cost. The key thing with any tracker fund is to make sure you track the right index.


  • Past performance. As the small print always says ‘past performance is not a guide to future performance’. However a look at the fund’s track record can show how consistent it is over time. If it has a good longer term performance over different market conditions it can certainly be a better starting point than if you find a fund with a terrible record.


I hope that hasn’t left you daunted by the task? There’s a lot to look at but it can be worthwhile investing a bit of time in this. After all, your pension will hopefully be a significant part of your future life.



Sarah Pohlinger