For readers in a rush:
- Funds are made up of lots of assets and group investors’ money together to invest into those assets
- You can even have funds of funds, which are the most diverse option for investors
- They’re quicker and easier to manage than single-company shares and they’re less risky
So, you want to invest, but you’re not sure how. Or you’re already investing into single company stocks and you want to add a little diversification to your investments. Or maybe you’re already a seasoned investor and you just want a little recap.
Don’t worry, we’ve got you sorted.
Here’s everything you need to know about investing in funds.
But first, the fine print. Although this article can give you some helpful tips, we can’t give you personal advice. When you invest, you could get back less than you put in. This is because investments can fall as well as rise. If you’re not sure if something is right for you, you can speak to an independent financial adviser through Unbiased. Link opens in a new window
What is a fund?
When you invest in the stock market, you can go it alone and buy shares in individual companies or you can have someone manage your investments for you in a fund.
When you invest in a fund your money is grouped together with other investors. The fund manager will then buy what are known as assets with that pooled money.
There’re lots of different types of funds. For example, you can have an equity fund, which is just made up of shares. Or a bond fund, which is just made up of bonds.
Need a refresher on assets, stocks, and bonds? Check out our jargon buster!
Each type of fund has its own characteristics, but they all have one aim: to offer investors the opportunity to diversify their investments, to minimise risk, and maximise potential returns.
You can think of funds like a box of eggs. Each carton is made up of individual eggs, grouped together. That’s exactly what an investment fund does. It groups together individual assets to make up a larger fund.
Another type of fund you can invest in is a fund of funds.
If you thought funds were diversified, these take diversification to the next level!
Funds of funds are the equivalent of lots of boxes of eggs in a crate in a supermarket. They can have a mixture of funds that span different assets, like stocks or bonds, and they can even be made up of different geographies.
A real globe trotter.
They give investors more exposure to a wider range of assets without the investor themselves having to select and manage their portfolio of individual funds separately.
What’s the benefit of investing in funds?
We’ve already mentioned that investing in funds increases diversification across different assets, even different areas of the world. But what’s the point?
Firstly, it takes the pressure off investors having to do the leg work, which saves time.
But it also reduces risk.
When you invest in a single stock or bond, you take on more risk because your investment is tied to the performance of that one single asset.
This would be like going to the supermarket and taking one single egg, throwing it in your basket and hoping it doesn’t crack on the way home. If it does crack, you don’t have any other eggs you can fall back on.
By investing in a fund, your money is spread across lots of different assets. So, if one doesn’t do so well, you still have others there that can potentially perform well.
What to think about when investing in funds
There’re a few things to consider when choosing a fund to invest in. First step is making sure the type of fund is right for you.
1. What’s the aim of the fund?
Each fund has an objective that it’s trying to achieve. This means the fund could be designed to take on more or less risk, depending on the objectives set out by the fund manager.
If you’re a slow and steady investor, or you’re nearing retirement, you might not want to take on too much risk. This is because the market can fluctuate, and the aim is to minimise your potential losses. On the other hand, you might be just starting out in your investment journey, or you might be younger and have more open investment goals. You may want to take on a little more risk to get higher potential returns, as your money will have longer in the market to weather financial storms.
Different funds also have different aims. Some aim to grow wealth, some want to provide an income to investors through something called dividends. These are payments made to shareholders. When you buy shares in a company, you become a shareholder and you own a little bit of the company. You can buy shares individually, or through funds.
Choosing the right fund doesn’t have to be complex. But knowing your investment strategy can help you pick something that’s up your street.
2. What are the fees?
Investors tend to want the same things. A potential return on their investment, and good value. When a fund manager is investing for you, you pay a fee to cover the cost of managing the fund.
A lot of work goes into the day-to-day maintenance of the fund, so fees cover this and the cost of buying and selling. Keep in mind that fees aren’t paid up front, they’re reflected in the value of your investments.
3. What’s the track record
The last thing to think about with funds is the performance. Now there’re no guarantees with investing because the market is quite fluid. It’s a bit like the ocean, sometimes it’s calm and sometimes it can get a bit choppy. There’s no predicting it.
We can’t use the past performance of a fund as a reliable guide to future results, but it’s an indicator of how the fund has performed in the good and bad times.
If it’s a steady eddy and doesn’t show much growth when the market is on the up, that might be an indicator of performance. But that doesn’t always mean bad performance! If the markets are on a downturn and the fund isn’t following the same pattern, it’s withstanding those fluctuations.
It’s hard to find the sweet spot, but that’s why fund managers are experts!
Where to next?
- Feel ready to start investing? Get started herewith investing.
- Already investing with us and want to put your newfound knowledge into action? Go to your account.
- Need to keep brushing up on your knowledge? Read our other articles on investing.