How to pick the right index fund & investment platform | Making Money Podcast

How to pick the right fund (from all the options)Once you've decided what you want to invest in, like a global index fund, or the S&P 500 (the biggest 500 companies in America) you should search for that kind of index fund on the platform you've chosen. Depending on what you're looking for, you'll probably be presented with various options.

You will see names like Vanguard or iShares (for BlackRock). These are basically different brands selling broadly the same thing, like types of olive oil in a supermarket.

Whenever you don't understand something, Google it, but here are some key things to look out for when choosing your fund:

Check where the fund is listed - is it the UK, US or elsewhere? Damo always buys the UK version (if there are multiple) to avoid being at the mercy of currency conversion.

Click on the Key Investor Information Document which covers various key points. Check the fund's objective. Is it trying to track an index, like the S&P 500? If you don't know what the index is, Google it.

There are often two types of the same fund - accumulation or distribution (sometimes called something else like dividends). Accumulation means dividends will automatically get reinvested rather than paid out to you. Distribution means dividends get paid out to you and then you can choose what to do with the money.

Look at the fees to find the best offer.

Check the past performance. You want to see how well the fund tracks the index - if the index went up 17.1% one year, did the fund go up by 17.1% as well? If you're looking at a few different options, you might want to compare the past performance of each against the other - although the difference should be minimal (if the funds are doing their jobs tracking the index!)

Google jargon you don't understand. For instance, high dividend means the fund invests in companies that have a track record of paying high dividends. Maybe that's what you want but maybe you don't want that because you want to benefit from the growth of smaller companies which don't have a track record so aren't in the fund. It's up to you, but you need to understand the stuff so you can make an informed decision.

Glossary of key termsAn index is a list of public companies (on a stock market) that meet specific criteria - and indexes are put together by companies. For instance, the FTSE 100 is a list that's created by the Financial Times of the biggest 100 companies listed on the London Stock Exchange - hence it's called the FTSE 100. Another famous index is a list of the 500 biggest companies in America, put together by Standard & Poor, called the S&P 500.

You can invest in index funds. An index fund can be bought and sold for one price per day.

Or you can invest in an ETF, an exchange traded fund, which often tracks a particular index, like the FTSE 100 or S&P 500. ETFs offer an easy way to invest in index funds because ETFs are traded like individual stocks, meaning the price moves all the time (when the market is open) and you can buy them easily on the platform of your choice.

If you're buying an ETF which is tracking an index, you should check whether the ETF is tracking the index physically or synthetically. Damo likes it to be physical because that means the ETF is actually buying shares in all the companies listed in the index, whereas synthetic means the fund is using complicated financial instruments to mirror the performance of the index.

Damo also mentioned representative sampling. This means that instead of buying shares in every company listed on an index, the fund is buying a sample of the companies to replicate the returns of the index. Here's the article Damo mentioned which explains more about the difference between physical (sometimes called full replication) and representative sampling.

A passive fund means no one is picking stocks - the fund is just tracking an index. This contrasts with an active fund, where someone (or a group of people) are hand-picking the stocks that are in the fund.

'All cap' means companies of all levels of capitalisation or size - small, medium and large.

Global and World mean the same thing. Thanks for nothing.

Accumulation means the dividends you'll get paid will be automatically reinvested. This allows you to 'set and forget' and build wealth over the long-term on auto pilot.

This contrasts with Distribution, or Dividends or other words - you need to hover over the explanation on the platform you choose. This kind of fund will pay you a dividend whenever there is one, and you can choose whether you reinvest it or not.

ESG means environmental and social governance, which means more ethical - at least in theory. Search what their criteria is because different people have different ethics.

And here's that compound interest calculator for you to play around with!

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