People starting off in the investment world may be looking for somewhere to put their money, but it can be confusing to know where to start with thousands of shares and bonds to choose from.
Sifting through this huge market to find profitable opportunities requires a lot of research that most people don’t have the time or resources for, so many opt for a fund.
A fund invests in lots of different assets – people who put money into a fund then have access to all those assets, which is more convenient than researching and buying them all individually.
The average performance of all those assets determines how well the fund does. If the share price of its assets goes up, so does the fund. If its assets do poorly, so does the fund.
Investing in a fund can take away some of the risk involved because you’re able to spread your money across more assets.
For example, if you put all your money into one stock that halves, you’d have lost half your money. Alternatively, if you invested in 10 stocks and one of them did badly, the performance of the other nine would counteract the negative impact on your overall investment.
This is often referred to as diversification and it has a crucial role to play in protecting your investments.
Investors often try to diversify across different sectors and regions too. If you own 10 stocks but they’re all in retail companies, they could all go down if people start spending less money.
Likewise, if you only invest in companies in Europe, they could all drop if the region goes through a tough patch.
Diversification allows you to cast a wider net and funds are a good way to broaden your investment reach.
The assets that a fund invests in are usually determined by its manager. This professional investor is often supported by a team of analysts, so everyday people can rely on their expert stock picking and insights that they wouldn’t otherwise have access to.
A fund that is run by a manager is called an active fund because there is a person making active decisions on how to spend investor’s money. Meanwhile,passive funds do not have a manager choosing what the fund invests in – instead, it will track a particular group of assets.
For example, you could buy a passive fund that only invests in the UK’s 100 biggest companies. It would only be able to track those 100 companies in that group, with no one actively deciding how that money is invested.
Firms will charge people who use their fund a fee for investing their money, which is called the ongoing charges figure (OCF).
This is a proportion of the money a person has invested in the fund. For example, if you invest £100 in a fund that charges an annual fee of 2%, you will pay £2 for using that fund.
Passive funds typically charge investors less money because they require less work. Active funds must hire managers and analysts to monitor markets and make decisions on how to invest money, so they charge a higher fee for this labour.