Rated Funds 2014: Cut through the choice confusion

Bewildering - it's a word that sums up the choices investors confront when deciding which investment fund or investment trust is deserving of their hard-earned money.

That's certainly the case at this time of year, as the end of the tax year approaches and people seek to make the most of their annual ISA allowance.

Whether they choose to invest their entire £11,520 allowance for 2013/14 in a stock and shares ISA, or to split it with a cash ISA, for many people the choice boils down to finding a fund that ranks among the best performers over three years, or even one year, and perhaps looking for the added reassurance of a couple of star ratings next to the fund's name.

Money Observer's Rated Funds are split into a number of different categories, including UK equities, developed market equities, Asia Pacific equities and emerging market funds.

They also encompass global and UK bond funds, lower-risk and higher-risk mixed-asset funds, property,commodities and specialist funds.

But those who adopt this approach are seeking to identify a home for their money from among more than 2,300 funds and 300-plus investment trusts, so they are likely to miss opportunities elsewhere.

Money Observer's Rated Funds system aims to take the guesswork out of this important investment decision. Many people would have relied on a financial adviser to make such a decision for them in the past, but find that's no longer an avenue open to them.

We explain the methodology behind our Rated Funds below, but it is important to bear in mind that this is more of an art than a science: although the most common trait among the Rated Funds is consistent past performance, there is no guarantee it can be repeated - we do not have a crystal ball that allows us to see into the future.

What's right for you?

While the majority of our Rated Fund choices are equity-oriented, we believe it's important to ensure investors have a healthy balance of investments which tallies with their aims and risk tolerance.

For investors with income as a goal, for example, this could mean generating the income from a variety of sources - such as funds focused on growing income from both small and large companies, along with bond funds that seek income from highly rated as well as junk corporate bonds and other fixed-interest securities. They could also consider other income routes, such as infrastructure investment companies.

But for many investors, particularly those just starting out, a general global or UK equity fund or trust should be the first port of call, alongside one of our mixed asset (lower or higher risk) selections.

For more advanced investors, it's also a good idea to build a balanced portfolio in various asset classes, and in funds and trusts managed by different investment groups. It means that you will not be overexposed to one particular sector of the market or a "house style".

We believe you should also consider investment trusts alongside funds - and this is something that is certainly unique about our Rated Funds selections because they are comprised of both.

Money Observer has long sought to highlight the merits and drawbacks of trusts alongside funds, and the Rated Funds system of grouping them within specific investment areas allows meaningful comparisons to be made.