Investment funds enable you to hold a mix of assets, spread risk and hand over stock picking to an experienced fund manager, but with over 3,000 funds available on the UK’s major investment platforms choosing between them can be mind-boggling.

We’ve come up with a list of the top 10 factors you should consider when deciding which funds are most suitable for you.

1. Your risk profile

Before you make any investment one of the most important questions you need to ask yourself is how much risk you’re willing to take. There is a huge variety of funds available which suit investors across the entire risk profile.

Deciding how much risk you should take usually comes down to your investment time horizon. Most advisers recommend that a 30 year old is more heavily weighted to equities than someone who is close to retirement, although if you’re 30 years old and are saving for a house deposit your time horizon would be shorter.

‘The first thing to consider is your personal circumstances. How long do you want to put your money away for? Can you afford a lump sum for a short time or a smaller amount for a longer time? Consider how much you can happily invest and forget about - funds are usually considered medium- to long-term investments, typically five years or more,’ explains Maike Currie, associate investment director at Fidelity Personal Investing.

If you have a very long timeframe you could opt for funds that invest in emerging markets equities, commodities and technology stocks. A low risk investor might prefer a multi-asset fund or an absolute return fund. Multi-asset funds can invest across the entire investment landscape which enables the manager to ride out market volatility. The goal of absolute return funds is to generate a positive return regardless of market conditions.

‘Remember at the heart of investing lies the risk-reward ratio - higher risk investments hold the promise of more lucrative returns but also come with a greater risk of losing your money. Establishing what risk-reward trade-off you are comfortable with is one of the most important considerations when choosing a fund and constructing your overall portfolio,’ says Currie.

2. Performance

Past performance isn’t necessarily indicative of future performance but it’s definitely worth looking at. Sites like Trustnet and Morningstar enable you to find out the cumulative performance over three, five and 10 years.

‘These historic figures are no guarantee for the future but a good long-term showing suggests there is a strong process here, run by a team which is capable rather than just lucky,’ says Charles Galbraith, managing director at AJ Bell Youinvest.

Cumulative performance can be a bit misleading because a manager could have performed extremely well in one year but underperformed in the others. The discrete annual performance shows how the fund has performed in each individual year.

‘Some fund managers provide strong returns in a rising market, whereas others will come into their own in difficult times. In either case past performance should provide a valuable insight into the potential of a fund to outperform prevailing market conditions, although this does not of course offer a crystal ball,’ says Caspar Rock, chief investment officer at Architas, the AXA-owned investment manager.

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3. Peer group comparison

When you’re analysing a fund’s performance it’s best to compare it with its peers rather than looking at the figures in isolation. Morningstar has a useful fund screener tool which lets you rank funds by their annualised returns. You can screen funds according to their investment category (for example UK equity income or global emerging markets) to ensure you compare like with like.

‘If there was a fund with one really strong year and four weak ones versus a fund which has beaten the market every year we’d probably choose the latter as we’d be taking on less risk,’ says Darius McDermott, managing director of Chelsea Financial Services.

4. Fund manager competency

The performance of an actively managed fund depends on the skill of the fund manager. Look at the manager’s track record and experience and see how they’ve performed in different points of the market cycle.

‘Also consider the constraints set by the investment house and how the manager’s performance is judged and remunerated. Does the fund manager “eat their own cooking” - i.e. invest in their own fund? Firms such as Morningstar, Standard & Poor’s and Moody’s offer handy guides to fund performance, creditworthiness and how consistent its management has been,’ explains Currie.

5. Investment style

If you want to dig really deep you could try to figure out the fund manager’s investment philosophy. This can often be gleaned by reading product factsheets and monthly fund commentary.

‘Are they motivated by looking for growth companies with market leading positions or by seeking out companies which are unloved by the market which offer good value? Does either style match your requirements and does the quantitative data indicate that the fund manager has had the courage to stay true to his philosophy?’ asks Rock.

There is a risk that a fund manager will diverge from their original investment strategy or leave and be replaced by someone new. In both cases you need to decide whether you’re still happy to be invested in the fund.

6. Fees

Fees can erode the overall returns of your investment so you should work out everything you need to pay and compare it with other funds’ charges. A typical annual management charge (AMC) for an actively managed fund is 0.75%. Funds that invest in riskier assets tend to have higher AMCs than funds that invest in lower risk assets like bonds.

As well as an AMC funds will have additional costs like trustee and auditor fees. This means the ongoing fund charge is a better indication of the costs you’ll have to pay, as it includes everything.

McDermott says fees are important but they aren’t the be all and end all. ‘We’re looking for that superior, consistent performance. Remember that the performance you see is after charges,’ he adds.

‘In the end, it’s a trade-off: your time, the fund manager’s expertise and the performance of the fund against the costs involved. Whether you feel this trade-off is attractive will be down to your personal circumstances and ultimately whether the money manager delivers the goods,’ says Galbraith.

7. Fund size

Sometimes funds can get too large which then compromises the manager’s investment approach and even hinders performance. Small cap growth funds, in particular, could suffer if the fund gets a large amount of cash from investors and the manager rushes to buy new investments that don’t suit the original strategy. There’s also a risk that the manager will drive up a small cap’s share price by trying to buy a large amount of stock, making it more expensive.

‘Whether the fund’s size is an issue depends on what type of assets it invests in. If the fund is buying large cap UK shares it can be bigger because of how liquid those shares are. If I was choosing a mid-cap fund and one was £200 million and the other £1 billion then I’d opt for the smaller fund,’ says McDermott.

8. Asset class

Once you’ve chosen a fund you need to assess which class of share or unit you wish to buy. An ‘income’ class distributes dividends directly into your dealing account, ISA or SIPP (Self-Invested Personal Pension). With an ‘accumulation’ class dividends and other forms of income are rolled up and put back into the fund, which increases the value of each unit of share held.

In general, the income option is intended for people who need income to support their lifestyle while the accumulation version is seen as a better option for long-term investors because the effect of compounding will significantly increase your pot of money.

‘Which one is most suitable for you will again depend on your personal financial circumstances and thus your overall investment strategy and time horizon,’ says Galbraith.

9. Diversification

It’s generally advisable not to put all your money into one fund. If you’re choosing several funds you should ensure those funds invest in a mix of assets, as otherwise you’ll end up duplicating your holdings and you could be over-concentrated in a single stock.

Currie says you should never make assumptions about the underlying holdings of a fund based on its name or sector. ‘Always look under the bonnet of the fund and check this carefully yourself,’ she says. ‘A fund’s underlying holdings may fluctuate depending on factors such as the broader economy, the stock market, rate changes and shifts in the fund’s investment style or process,’ she says.

You can diversify across assets - for example stocks, bonds, cash and property - as well as by market capitalisation, sector and geography.

10. Turnover

If you really want to get down to the nitty gritty you could look at the fund’s turnover - i.e. how long it holds on to the stocks it buys. The longer it holds stock the lower the turnover will be and the lower the transaction costs incurred by the fund.