Making the right moves

Tempted to invest in equity funds? Perhaps you know you want an investment fund, but you're not sure which type of fund is right for you at the moment? Or is it choosing individual funds to complement your existing portfolio that is the challenge?

More people are opening investments this year than in 2003. However, unlike previous years, investment choices are being spread across a broad range of funds, rather than being concentrated in a particular sector or geographical region.

This absence of a dominant trend is good for investors. If a particular type of fund is monopolising the market or a star fund is attracting all the attention, investors face the potential danger of choosing a fund ill suited to their actual needs.

Have your investment goals changed?

Different funds suit different goals and investing needs. If your circumstances have changed since you started investing, you may need to fine-tune your strategy. Relatively higher risk growth funds, for example, may no longer be suitable if you are approaching the time when you will need to draw on your investment.

Think carefully about risk

The words "the value of your investment can go down as well as up" are so familiar it is easy to forget what they really mean. Ask yourself how you will feel if your investment does fall in value.

Your answer probably reflects your reasons for investing. If you need an income, you might be very concerned at the prospect of a drop in value, so you should consider lower-risk funds.

On the other hand, if you do not plan to use your investment for five or ten years or more, you may be more willing to weather the ups and downs of a share-based investment. This will give you the opportunity to benefit from the stock market's potential for producing longer-term growth.

Look at your other investments

Do the funds you have bought in previous years form a well balanced portfolio that suits your investment goals? You may notice that you have not invested in an important type of fund and use a new investment to fill the gap.

Or if you have built up a solid foundation of mainstream funds and you may want to add a fund that will create broader diversification.

Bonds - can they still add value?

During the post-bubble market downturn, some of the best performing investments were lower risk corporate bond funds.

When the economic outlook seems more positive, investors might be expected to turn their backs on bonds in favour of shares. However, the bond market still has much to offer.

If you are investing for growth, a bond fund can give you:

¤ a relatively solid foundation for your portfolio during periods of turbulence in the stock market; and

¤ a way of keeping your investment risk down, if you may need your money in the relatively short term - perhaps because you are nearing retirement.

Shares - the risk/return trade-off

The shorter-term unpredictability of equity markets are a fact of investing life. The chart on the right compares the 12-month performance of various world markets from June 1, 2003, versus their performance for a similar period starting just three months later.

This degree of volatility does not mean equity markets should be avoided. Rather, it should simply be viewed as the price one must pay (or burden one must bear) to receive the historical longer-term outperformance of equities compared to returns on bonds and cash.

If you maintain this perspective, the importance of setting up your portfolio correctly from the start, being patient and resisting the urge to make changes because of temporary market factors, becomes readily evident.

Mr Kowal is a director of Fidelity International Business Development Unit, UK. Fidelity means Fidelity International Limited, established in Bermuda, and Corp., established in the United States, and their respective subsidiary companies and affiliates. Fidelity Funds SICAV is promoted in Malta by Growth Investments Limited and is licensed by the MFSA.