The popularity of unit trusts has soared - but so have their diversity and complexity. There are now hundreds of unit trusts families and thousands of different funds of countless flavours. So, how would you go about choosing the unit trust that best suits you? As you have no way of knowing what tomorrow’s growth sector or top performing fund will be, your choice of investment will be dictated by a number of factors.

Matching your unit trust purchase to your risk profile

• When choosing a unit trust, you should identify your personal needs and select a fund that best suits your investment profile. For example, you may be looking to invest in a fund that invests in areas that interest you, such as Internet technology or perhaps an ethical fund.
  
  
• Next, are you a short- or long-term investor? With unit trusts, you need to give your money time to grow. Unit trusts are a medium- to long-term investment (3-10 years) so that market fluctuations have time to smooth out.
  
  
• Then, the type of fund you choose will depend on the amount of risk you are prepared to take. Your attitude to risk is usually the overriding factor - if you are not prepared to expose your capital to any potential loss in the short term then most funds won't suit you. On the other hand, if you are investing a small amount of your capital that you are prepared to lose, then a high risk, speculative fund could offer greater potential gains in return.

Prospectus from the unit trust provider

• Investors should read the prospectus of various funds and identify those with stated objectives in the prospectus that match their own investment objectives. Investors will soon discover that there are many unit trusts whose stated objectives match their own aims.

Confirm that unit trust provider has a solid presence in the industry

• Whenever possible, investors should find out the credentials and track records of the fund management companies (is it a reputable name, what is the size of its asset base, are there multiple funds available, are there options available to switch between funds) and the fund managers managing the unit trusts that they are interested in.
  
  
• Whether your fund performs or not will depend on the particular stocks and markets the fund is invested in and the competence of the fund manager. Investors should, therefore, pick those unit trusts, which had successfully positioned their funds and attained their stated objectives in the past.
  
  
• Another area of concern is the degree of diversification achieved by unit trusts.

Focus on fund’s attributes

• Of all the possible influencing factors, the past performance of a fund is perhaps by far the most important. Investors should select those unit trusts whose superior performance tends to be maintained over time. This can be done by comparing the rankings of unit trusts across consecutive periods of time, such as comparing the fund’s performance with other funds having the same investment objectives or against market benchmarks. Micropal is one such agency that tracks how each fund performs. Its table of rankings is published on the Personal Finance and Investment page of The Business Times at the beginning of each month.
  
  
• Whilst past performance is no guarantee of future returns, if a fund manager has done consistently well in the past, it is reasonable to assume he may do better that average in the future. It is important, therefore, to ascertain if the portfolio manager responsible for performance is still with the fund.

Check expense factors

• Most funds charge a fee for managing your money. This fee is usually charged up-front (front-end load) when you buy the unit trust. Some are charged at the point of redemption (back-end load) whilst there are others which do not have any charges (no-load).
  
  
• So, how much should you be expected to pay? Usually 3% to 5% of the money you invest. Generally, the cost of investing in a unit trust is slightly higher than investing directly in the stock market because you are paying someone to manage your money.

Check fund’s ex-distribution date

• It is advised that you do not invest immediately prior to this date to avoid tax liability.