Funds are a pooled investment – they issue shares to a large number of investors and fund managers use that money to buy shares, bonds and other assets. These are also classified as low, medium and high risk.
There are many types of funds – they may focus on:
- Generating income – by investing in companies paying high dividends.
- High capital growth – from identifying smaller companies likely to succeed in the future a particular industry or region.
Think of what you hope to achieve with your investment. Calculate what percentage of your wealth you are investing. Make sure you do understand the choices you make.
The key advantages of a fund include:
- Diversification – Funds hold a variety of assets, protecting you against major losses should a single investment lose value
- Expert opinion – Fund managers are constantly analysing the market and making decisions on behalf of their investors, saving you the trouble of researching assets on your own
- Greater reach – Funds give you access to assets that may be hard to invest in on your own, including overseas investments and specialist products like commodities.
The drawbacks include:
- The value can go down as well as up and you can lose money.
- These are medium to long term investments, so may not be suitable for everyone.
Managed vs. passive funds
A managed fund has its investments chosen by a fund manager. Fund managers use their judgment (and a lot of research) to select the investments that best match the objectives of the fund – and as long as those are of a type that the fund’s rules allow them to invest in, they have a degree of freedom in their choices.
A passive fund, on the other hand, selects its investments entirely automatically, based on predetermined rules. Most passive funds are index trackers, which don’t aim to maximise returns but simply to mirror the performance of their underlying index, such as the FTSE 100 or S&P 500. If the market falls by 30%, a good index tracker will do the same.
Make sure you read the policy document of the fund and know what management charge is being levied.