How to find the fund that fits

With 1,600 unit trusts to choose from, Dido Sandler provides a guide to picking a good performer that suits your needs: People prepared to accept the ups and downs of the stock market might start with UK income trusts.

SELECTING just one from the 1,600 unit trusts available is daunting and perhaps the challenge has even put many people off investing.

You can come unstuck without a clear picture of your investment goals and the sort of unit trust most likely to achieve them. When selecting a trust, you should first determine your personal objectives and limitations. That includes how long you are prepared to invest for, whether you want income or not, and how much of a roller-coaster ride you can live with. You should take into account any other investments you already own.

If you need cash now, for everyday living expenses, it is best kept on deposit in a building society or bank account, not in a unit trust. If you can afford to put away money over one to three years, cash or money market unit trusts provide money market rates of interest, with pretty low risk and charges.

Bond or balanced unit trusts are further up the risk scale - but not as far as share-invested unit trusts. They offer the potential for better returns than cash. But to maximise your chances you'll need to plan on investing for at least three to five years. Both offer reasonable income. Whereas bond funds generally have little potential for capital growth, balanced funds - which invest in a mixture of shares and bonds - offer more.

As well as exhibiting a lack of capital growth, bond and cash funds are more prone to loss of real value from inflation than share-based unit trusts, which may offer lower income at the start, but allow both income and your original capital the potential to grow.

People prepared to accept the ups and downs of stock market investment but who also want income should start with UK equity income unit trusts.

Those putting money away for some future need - be it to pay off a mortgage, or to save for retirement - might prefer a growth fund. UK equity growth trusts are the starting-point here. Moving up the risk scale - but also offering the potential for relatively greater returns - are UK recovery and smaller company funds, and trusts investing overseas. Emerging markets are the riskiest foreign funds - witness the problems of the Mexican market over the past year.

General equity funds aim to combine growth with income. But income funds can also sometimes outperform growth trusts. Growth trusts, however, have the greatest potential for growth, especially if one is prepared to stomach a higher degree of risk. In 1993 the Hill Samuel UK Emerging Companies fund grew by a huge 71 per cent. To succeed with these riskier punts, good timing is often essential. Bad timing can lead to heavy losses.

Once you understand your personal requirements, you can try to pick the best fund within a chosen sector. It is important to use a variety of selection criteria, among them past performance, charges, management team and philosophy, and the current investment outlook. Perhaps you should consider also fund size or the time of year when dividends are paid out.

Past performance is not necessarily a guide to the future. But consistent and strong capital and income growth do establish at least some reliability.

Before choosing a fund, it might be worth looking at others managed by the same group. If this trust is a solitary performer, and the rest are dogs, it might be a sign that your fund is overly dependent on one star manager, who might subsequently leave.

Lower charges are desireable. Over longer periods the difference between even an annual fee of 1 per cent and one of 1.5 per cent can make significant inroads into returns. But sometimes the best funds will rightly charge for their services.

Amanda Davidson of independent advisers Holden Meehan says special discount offers are only worth taking up on funds which you are already thinking of buying.

A fund is highly dependent on the manager or management team running it. So in order to choose well, you should try and find out as much as possible about their track records at the company and previously.

Find out if key managers have left. Schroder UK Equity's high-octane manager, Jim Cox, and Credit Suisse Income's Bill Mott, for example, are considered key figures at their respective companies.

Also check for consistency in investment strategy - recent and significant changes could affect performance. This sort of information is available through independent financial advisers, sometimes in the press, or in reports put out by the management company.

Market conditions are another factor that may influence your choice of fund. An example is UK Recovery funds, which, like Guinness Flight's, are jolly good at stages when the UK economic cycle is looking up, as it was last year. This year, however, the fund is suffering from slower growth.

IFA TIPS

Amanda Davidson, partner, Holden Meehan

Ms Davidson prefers Perpetual Income Fund for consistent performance and strong management. For growth, she favours Schroder UK Enterprise.

Graham Hooper, investment director, Chase de Vere

Prolific High Income pays out consistently good dividends every year, which Mr Hooper applauds for income seekers. For growth he backs Schroder UK Enterprise and Morgan Grenfell UK Growth.

Roddy Kohn, partner, Kohn Cougar

Schroder Pacific Growth unit trust is Mr Kohn's preferred growth vehicle. Although this emerging market fund is higher risk, he believes the current outlook is good.