Choosing and switching funds

When it comes to investing your hard-earned money, it’s important to make the decision that’s right for you. Smart investing isn’t just about ‘what’ fund to invest in – it’s about asking yourself ‘why’, too. Whether you’re choosing a fund for the first time or reviewing your existing fund choice, we’re here to show you how.

Let's break it down.

Choosing the right KiwiSaver or investment fund to put your hard-earned money in can seem complicated – but it doesn’t have to be. Basically, it comes down to two questions:

1. How much risk are you willing to take? 
2. What and how long are you investing for?

It’s important to understand that all investments have a level of risk. With investing, as with most things in life, there’s a trade-off between risk and reward.

Different funds have different levels of risk and reward. For example:

• Growth funds invest mainly in growth assets like shares and property, which can have a higher level of risk. That means they’re more likely to fluctuate in value in the short term – for example, if there’s a market downturn. However, history shows they usually bounce back faster when markets recover, and typically deliver higher returns over the long term.
• Conservative funds invest mainly in income assets like fixed interest (e.g. government bonds) and cash, which have a lower level of risk. That means their value is more stable (i.e. they don’t fluctuate so much), but they also typically deliver lower returns over the long term.
• Balanced funds invest more or less equally in both growth and income assets. As the name suggests, they try to achieve a balance between risk and reward that is somewhere between growth and conservative funds.

It’s really important to choose a fund with a level of risk that you’re comfortable with. Ask yourself which fund you’d be happier with:

• A fund that can have big swings in value from time to time, but has the potential for better returns over the long term
• One that is more consistent, but with lower long-term returns, or
• Something in the middle.

Worried you’ll make a mistake? Don’t be. It’s easy to adjust your fund if your situation changes (more on that below).

The other key thing to think about is why you’re investing, and when you’re likely to want access to your savings.

For example:

• Let’s say you’re 30 years old and you’d like to invest for your retirement. With at least 35 years until retirement, there’s plenty of time for your fund to grow and recover from the inevitable market movements along the way. A growth fund may be a good choice, because growth funds typically deliver higher returns over the long term – and you’re in it for the long haul. 
• But maybe you’d like to buy a home in the near future. In this case, you’ll need to know exactly how much money you have available for your house deposit. A conservative fund may be a good choice. It has a lower level of risk so it’s less likely to fluctuate in value – which gives you more certainty about how much money you have, when you need it.
• Or perhaps you’re just incredibly busy, and want a fund that moves seamlessly with you as you move through life. Some KiwiSaver schemes offer options that switch funds automatically for you. For example, our Lifetimes option moves your money automatically as you get older, into the fund that’s considered appropriate for an average person of your age.

Once you’ve chosen a fund, it makes sense to keep an eye on it to make sure it’s still meeting your needs. Set time aside regularly to review your appetite for risk, your goals, and your investment timeframe. These may change as your situation changes. If you’re investing for your retirement, for example, what was appropriate for your 30 year old self (with a long time until retirement) might not make sense when you’re 60, with just a few more working years to go. 

If you’re thinking about switching funds, it’s important to understand why. Is it because of a change in your circumstances, or is it a reaction to market events (such as a market downturn)?

When investment markets are down, your fund balance can go down too. When that happens, it can be tempting to try and ‘course correct’ by switching to a lower-risk fund (for example, from a growth or balanced fund to a conservative fund). At this point, take a step back and ask yourself ‘why’.

Remember, it’s normal for your balance to fluctuate. Shifting from a growth or balanced fund to a conservative fund may ‘lock in’ your losses, which can be an expensive mistake.

Higher risk funds can fall faster in market downturns, but they can recover faster too – and over the long term, history shows us that they generally recover those losses (and continue to grow). So by switching to a lower risk fund in a downturn, you could miss out when the market recovers.

When your balance falls, it’s natural to want to take action. But if you’re investing for the long term and your risk profile and investment goals haven’t changed, doing nothing is often the best option.