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First Steps: Step Eight - Hands-off Investing

Giving responsibility for your share investments to someone else can seem like a good idea. Hands-off investing through funds can be less labour intensive, but is it possible to make good returns in the market without having to make any effort? This article will examine a more passive approach to investing and you will quickly see that even managed funds and unit trusts need an investment plan.

Investing in the stock market can take many forms. In the previous three articles we have discussed short-term trading for profit, and long-term investing for growth and value. All of the approaches discussed require an ongoing commitment to set trading plans and careful monitoring by you, the investor.

Some people are unwilling or unable to commit themselves to such an active approach to the share market. Many people begin with the best intentions but lack the discipline to successfully implement and follow through with self-directed investment plans.

Hands-off investing using managed funds, unit trusts, and advisory services can give new investors the guidance required to confidently and safely commit capital to the market.

Despite the convenience that these services offer, you should still carry out extensive research, and create a logical investment plan.

Managed Funds have been available to investors for many years. Funds are made up of the capital of individual investors. Each investor contributes a separate amount of money, and those who manage the fund invest the resulting combined capital.

A variety of managed funds are available. In previous articles, we have discussed the different methods that individuals use when choosing which shares to buy. Fund managers use the same strategies when deciding how to invest.

A fund manager will typically specialise, or prefer one type of investment strategy. This means that there are specific types of funds. For example a manager might understand and be skilled at investing in growth companies. This type of fund is referred to as a "Growth Fund.'

Funds can also be focused on investing in specific sectors, industries or countries, in different money markets such as bonds, or in undervalued shares. In recent years many different types of funds have emerged. It is often a daunting process to sift through each to decide which one is worthy of your investment capital.

As an investor, you must decide what type of fund best suits your investing goals and the risks you are prepared to take. This decision is personal, but should be focussed on the following considerations.

- Returns

Returns are an essential consideration. One of the most important things to understand is that the past performance of a fund gives no guarantee of its future performance. Most fund management companies will make this explicitly clear in literature and application forms.

However, past performance should still be considered. If a fund has made good returns for several years, it should certainly be favoured above badly performing funds.

- Fund Manager

The fund manager is the person who has ultimate control over what your money is invested in. In large fund management companies, it will be extremely difficult to identify one individual who fits this description.

In smaller companies, the manager will be easy to find, and you might even be able to meet with them personally. If a manager has several years' experience in the industry, they should be willing to show you some history of their performance. A good fund manager in a weak market will still be better than a bad manager in a strong market.

- Fees

As a fund investor, you will be charged fees. Most funds have an entry fee and may also charge a yearly management fee. In addition, there will often be a significant penalty fee for exiting the fund before the end of the agreed time period.

- Investment Timeframe.

The investment timeframe is an important consideration for all investments. Because funds typically have lower returns than investing in shares directly, they should be considered as a long-term investment.

Compounding returns can provide a fund investor with good long-term returns. Most funds will automatically re-invest all profits, but if you are given the choice, it is beneficial to re-invest and compound your returns.

Most fund investments should be for at least five years. Many funds are aimed at longer investment timeframes and are often promoted as effective retirement investments.

- Savings Plans

Most funds will offer you the ability to add to your investment capital over time. Setting up a regular saving scheme can be a great way to grow your investment capital. When assessing potential returns, it is important to take this into consideration.

- Added Value

Some funds now offer additional services. You might find a fund management company that will offer you a personal consultation. Other services that have emerged recently include educational programs, and regular investment newsletters.

It is important to research thoroughly and carefully before committing your investment capital to a fund manager. There are several tools available to you for research. These include investment calculators that can be found on the web sites of many banks and fund management companies. It is important to compare the results of different calculators because some include factors such as inflation and fees while others do not.

Investment in Managed Funds can provide you with a less active involvement in the share market. It is still important to carefully consider the factors that will influence your returns and choose the correct fund for you investment objectives.

The next article will begin to bring together some of the strategies that have been discussed in the "First Steps" series of articles. We will look at real investment examples, and discuss how you are best to begin building yourself an investment plan.

This article was written by Nick McCaw from Intelligent Investing