Estimated reading time: 7 minutes
Funds are a quick and easy way to invest and come already diversified and professionally managed, making them a popular choice for new and experienced investors.
Funds are not a short-term option – investors should leave their money in a fund for at least five years to make the best profits.
Hundreds of financial firms offer funds for growth or income.
Choosing the best funds that match your ethics and financial goals is not always easy.
This guide explains how to invest in funds in simple terms.
Table of contents
- What Is A Fund?
- Investing In Funds Basics
- Starting To Invest In Funds
- How To Invest In Funds FAQ
- Related Articles, Guides and Insights
- Questions or Comments?
What Is A Fund?
A fund is a set of investments picked and supervised by a fund manager trying to match a set of objectives.
The investments and objectives vary between funds but generally include aims like providing investors with a certain income level or meeting a target growth for each year.
Funds divide into units. Each unit is worth a proportion of the fund’s value.
The fund manager chooses the underlying investments, which are typically stocks and shares, commodities, foreign stock markets, cash or bonds.
Investing In Funds Basics
Funds pool investments from a group of people, which means as an individual, investing through a fund is often cheaper than direct investment because the costs are shared.
Funds come in three basic types – unit trusts, open-ended investment companies (OEICs) and investment trusts.
Some other factors investors should know are:
The difference between active and passive management
A fund manager and a team of analysts run actively managed funds. They pick the investments and keep an eye on performance. The aim is to match or beat the returns offered by stock markets and other funds.
Passive funds, also called tracker funds, aim to do as well as a stock market. Passive funds generally have cheaper charges than an actively managed fund because they have no management team to pay for.
Both types of funds move up and down with the shares or markets they are following, so investors have a potential to gain and lose money.
Income and accumulation
Different investors have their reasons for investing. Some are older and look for shares to pay an income, while others are younger and are looking to grow their wealth.
If you invest for income, the fund pays on any dividends and profits from share sales.
If you invest for growth, dividends and any other payments are reinvested.
Income funds often have the label ‘INC’ in their title, while growth funds have the label ‘ACC’.
If you invest for ten years or more for retirement, opt for accumulating shares.
Shares are traded continuously when a stock market is open, but funds tend to trade only once daily at noon. This is called the valuation point,
You won’t know the price in advance if you buy or sell units because the trade will go through the next valuation point.
Fund charges and commission
How much you pay in charges and commissions depends on the fund and how often you buy or sell units.
The fund manager takes a slice of the fund as an ongoing charge (OCF) expressed as a percentage of the fund.
Other charges include money taken by the company holding your investments and trading charges.
Choosing the right funds
Thousands of funds are vying for your attention, but choosing the right one for you is not easy.
The first indicator investors look at is how the fund has performed in the past, but this is not a good indicator of what might happen in the future. Plenty of celebrity fund managers have gone down with their ships that have a shiny history of posting top returns.
In truth, past performance is only part of the picture and not a reliable guide.
A fund may do well and suddenly slump because a superstar manager or analyst leaves the team. Some funds are on autopilot, like oil and gas funds that do well when the prices of oil and gas are high but not so well when the price bombs regardless of what the fund manager does to hold an even course.
So how do investors pick a potential high-flying fund?
Research and more research is top of the list of what to do to pick a fund. Besides the broader market activity, delve into the personalities managing the fund and the potential of each share held in the fund to turn a profit.
Next, consider industry sectors. A sector is the area of a market that the shares held by a fund are in.
Sectors can be countries or regions, like The UK stock market, the European Union or Asia Pacific.
They can also be types of business, such as cryptocurrency, technology, pharmaceuticals, mining or food.
Volatility is an investor’s friend
When professionals talk about investors, they are thinking about people who hold shares for at least five or ten years. Investors in a market for shorter times are traders.
Traders look to volatility in the market to make their profits by taking a gamble that a share will go up or down by a few pennies within a few hours.
Investors smooth out volatility by assuming the market will recover from any big shocks over a decade or longer.
There’s no reason why someone can’t be an investor or trader at the same time. Just hold some spare cash for trading and wait for an opportunity.
Charges can cost thousands
The more often you buy or sell investments, the higher your fund charges and commissions will be.
Investors will pay active fund managers a slice of their pie – probably 0.5 to 0.8 per cent of the fund’s value every year.
The dealing platform will also want a slice – likely 0.5 per cent of the fund value or less.
Other charges are more manageable – about £20 to buy or for a sale – and this is one you decide by the number of trades you make.
Over the years, these charges can knock tens of thousands off the value of a fund.
Passive fund charges are much cheaper. Most trackers charge a 0.1 or 0.2 per cent annual charge, have no management fees and charge £10 a trade.
Starting To Invest In Funds
Plenty of people invest directly into funds without the help of a financial adviser.
Modern smartphone apps are easy to use and allow investors to make real-time decisions about their money.
Choose the online platform that best suits your financial aims to start investing. The platform will place trades for you and hold your investments online.
In return, the platform should offer in-depth fund analysis, some ready-made portfolios and general news about the financial world.
How To Invest In Funds FAQ
ETFs are funds traded on a stock market that are generally trackers.
Ethical fund managers avoid buying into shares or markets that are considered to have poor social responsibilities, a bad attitude to the environment and slack governance.
The government or company issuing a bond raises money from an investor in return for regular interest payments. A bond is not the same as buying shares in a business but more of a loan over a fixed term with an interest guarantee. Government bonds are often called treasury bonds or gilts.
The unit price is the value of a fund divided by the number of units in the fund. For instance, a £1 million fund with 1,000 units is worth £1,000 a unit.
The best fund for you depends on how much and how long you want to save and your attitude to risk. If you are prepared to lose some cash in return for a higher reward, your options differ from those open to an investor who prefers a lower risk and smaller return.
Related Articles, Guides and Insights
Below is a list of some related articles, guides and insights you may find interesting.
Questions or Comments?
We love to get feedback from our readers. So, after reading this article, if you have any questions or want to make comments, send us a message on this site or our social media.
Don’t forget that you can also request the guides sent directly to your email inbox.