Wealth warning: ratings go down as well as up

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There is no way to be certain that the fund in which you invest will be successful.

As soon as you look at an advertisement or a brochure for a unit trust you will see what is commonly known as the "wealth warning", underlining the speculative nature of any investment related to stock market performance. "Past performance is no guide to the future," it says. "The value of your investment may go down as well as up and you may not get back all the money you invested."

But while the value of your units - or, for that matter, shares in an investment trust - may vary, they are a much better bet than savings accounts. But with 1,600 unit trusts and 350 investment trusts, how do you decide which fund is right for you?

There is no easy answer, except to say that doing some homework could well pay off handsomely. The first thing to establish is your investment objective. Have you just inherited pounds 100,000 and want it to provide a regular income to top up your salary? Have you just earned a pounds 5,000 bonus that you want to enhance long term and possibly top up in the future, or are you looking for a way to save pounds 50 a month for several years? That helps to narrow the field.

Then you can look at the performance of individual funds. Rating companies such as HSW and Micropal analyse performance and produce statistics to help investment decisions, whether made by professionals or not. The two companies are totally independent of the funds whose performance they analyse, so you can be sure that the figures are genuine. They use slightly different methods but you can safely ignore any minor inconsistencies.

Performance information is available from a variety of sources: the money pages of the Independent on Saturday includes a page of unit trusts statistics supplied by HSW, which summarises how well or badly individual funds are doing compared with others in their sector, or across the market. More information is available from specialist magazines, while if you are an Internet user you can consult the Micropal ratings online.

A WorldWide Web service called Interactive Investor (http://www.iii.co.uk) includes both data on individual funds and useful charts showing the top performers over one and five years. The charts enable you to compare the performance of funds in each sector and how individual funds have performed relative to the top performers in their sector. But you should not base your investment decision purely on the ratings since, as the wealth warning reminds us, they are concerned with past performance, which may be no indicator to the future. It pays to find out more about fund managers and their investment philosophy.

The fund managers are the people who make the investment decisions. The literature will normally tell you how long they have been in the job and this is information worth checking, since a change of manager could make impressive past performance statistics irrelevant in the future.