Investing in UK Funds: How patience, diversification, and the right fund choice can make a difference.
Short-term market swings, can cause concern for even the most seasoned investors. Whether you’re investing in global markets or focused closer to home, two key strategies can help you stay on track: patience and diversification.
This, mixed with having the option to invest in passive and active funds, allows you to tailor your investment approach to fit your financial goals.
The importance of staying the course
The third quarter of 2024 saw more conservative returns for investors, but the bigger picture remained in clear focus: sticking with your investments can pay off in the long run.
The stock market is cyclical, meaning it retracts and expands frequently in cycles. And can be influenced by wider macro-economic changes, such as political uncertainty.
When market volatility strikes, it’s tempting to pull back and perhaps withdraw investments in favour of fixed cash returns. But this could mean missing out on gains when markets rebound.
Historically, markets tend to recover from downturns over time, which could reward investors who remain steadfast when market uncertainty arises.
This applies whether you’re investing in UK shares or taking a more global approach—staying invested through the ups and downs is key.
For example, Virgin Money funds from the 12 months to the end of September, showed strong returns, with investors enjoying gains ranging from 9% to 18%. Those who stayed invested benefited from global market recovery seen earlier in the year. Really highlighting the power of patience when it comes to investing.
Diversification Isn’t Just About Geography
If you think of a diverse fund, you might think about something that covers different geographies, or different asset classes. But diversified investments can also be found within a specific market.
Even when investing in a pure UK-focused fund, diversification can play a vital role in managing risk.
Take the Virgin Money UK Index Tracking Trust fund, for example. This fund returned almost 13% over the past 12 months up to the end of September. It focuses solely on UK shares. And while it may seem like you’re putting all your eggs in one basket, this UK fund invests across different sectors and companies.
The idea is that when a fund holds a broad array of UK centric businesses, whether they’re blue-chip or medium enterprises, when one industry or sector struggles, the others are there to limit potential losses. Or at least recover some loss if one sector underperforms.
Within-market diversification can help to smooth over the more dramatic and potentially riskier highs and lows of investing in individual stocks or sectors alone.
However, it should be said that the most diversified investment portfolios, are ones that include an array of geographies, sectors and asset classes. This gives investors the best chance of limiting investment risk.
Active vs. Passive Funds: which approach is right for you?
Another important decision for investors is choosing between active and passive funds, or even having a combination of the two.
So, what’s the difference?
Passive Funds: These funds, like Virgin Money’s UK Index Tracking Trust fund, aim to mirror the performance of a specific market or index, such as the FTSE 100. They do this by following the market, rather than trying to outperform it. Passive funds tend to have lower fees than actively managed funds and provide investors exposure to a broad range of companies.
This can make them a great choice for first time investors, or investors seeking long-term growth. Virgin Money’s UK Index Tracking Trust fund, up 13% in the last 12 months to the end of September, is a great example of how a passive approach can still deliver solid returns.
Active Funds: Active funds involve fund managers selecting specific investments with the aim of outperforming the market.
These funds can be more, or even less concentrated. But the main difference is they utilise the skills and knowledge of the fund managers to make decisions on behalf of investors.
Active funds can offer the potential for higher returns but can come at a higher cost. This is because of the fund managers expertise, and time spent picking the right companies or sectors to outperform. As well as the ongoing monitoring and optimising of the fund.
A mix of both: Some funds, like Virgin Money’s Growth funds and Defensive fund, are designed to sit in the middle of passive and active funds. They include trackers within the portfolio, but they also have the benefit of a fund manager who actively manages the fund closely.
The fund manager will have a strategy for each asset, ensuring that it achieves the right risk-return target based on the overall fund’s goals. They’ll allocate a mix of asset classes and markets, maintaining them over time, and rebalancing the fund in response to their performance. Whilst also using passive market benchmarks to track the performance of the fund. This ensures the fund is meeting its risk-return goal.
They’re slightly more expensive than purely passive funds, but not as expensive as active funds. They’re also diversified, meaning they’re great for investors who want a hands-off approach to their investments. As well as having access to different asset classes and markets.
Diversification—The Key to Balancing Risk and Reward
Whether you’re investing in UK shares or taking a more global approach, investing in trackers, or managed funds. Diversification remains one of the most effective tools to manage your investment risk.
Diversification and investment risk go hand in hand. And knowing your appetite for risk, can help you make the right investment choices for you.
Virgin Money’s customers have access to different funds to suit their risk appetites.
For example, the Cautious, Balanced, and Adventurous approaches delivered returns of 12%, 15%, and 17% respectively for the last 12 months to the end of September. It shows that a more aggressive strategy can lead to higher rewards over time. But for some investors, a more cautious approach may work best for them.
These funds are also designed to perform best when investors keep their money within them for five or more years. As short-term growth and past performance doesn’t give a clear picture of how the fund will perform in the future.
Virgin Money's Global Share Fund (up to 18% over 12 months to end of September) spreads its investments across different regions, sectors, and companies. Resulting in the benefit from strong performance in US and Emerging Market based shares. Meanwhile, the Bond Fund (up 11% from the 12 months to the end of September) diversified its bond holdings by including riskier corporate bonds (BBB rated) alongside safer government bonds, providing a good balance of risk and reward.
By spreading your investments across different types of assets—whether shares, bonds, or sectors—you reduce the chance that any one market event will significantly impact your portfolio.
A strong investment strategy is one that relies on both patience and the investor developing and understanding of their risk appetite. Markets will often go through periods of volatility- it’s a given. But staying the course allows you to benefit from long-term growth. And diversification allows you to benefit from an element of risk control.
In the end, whether your focus is global or purely UK-based, maintaining a diversified portfolio and resisting the urge to react to short-term market movements will give you the best chance of reaching your long-term financial goals.