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An overview with Guy Myles

What Are Investment Funds?

Guy Myles, 26 May 2016

How to invest money in a fund.

In this article you'll learn:

  • What investment funds are and how they work
  • How you can benefit from investment fund management

There are thousands of ways to invest your money, from the relative safety of cash ISAs to more volatile stocks and shares. Each exposes you to a different level of risk, but deciding how much risk to take on is often tougher than it sounds. With an expert adviser to guide you, investment funds could play a major part in your investment portfolio.

Before we look at the different types available, let's see what investment funds are and how they work. In short, investment funds are collective investment vehicles run by a fund manager, or team of fund managers, who pool your investment with those of other people and take the investment decisions for you. In exchange they will charge a fee, but they will also invest your money wisely and, hopefully, get a return on your investment.

Of course, investment funds are subject to normal market fluctuations, and your initial investment - your capital investment - could go down as well as up.

Types of investment funds

Investment funds have been around almost as long as the modern banking system, so there are plenty of varieties out there. Mutual funds, hedge funds, private equity funds - they're all investment funds, but the most common fund types are 'unit trusts' and 'open-ended investment companies' (Oeics). Both are run by a fund manager, who buys equities (shares in companies) and then offers slices of the fund, or 'units', for investors (like you) to purchase. Oeics differ slightly as they are run as companies, so the units are instead called 'shares'.

Investment funds: why they're worth considering

So why should you put your hard-earned cash into the hands of a fund manager? Here's three reasons why investment funds can be a good decision:

  1. Diversified risk. Investment funds give safety in numbers: you are essentially buying a stake in a much larger investment portfolio. The size of which means it can buy a broader range of underlying investments than you'd be able to achieve on your own. Exposure to individual risk is reduced as your investment is spread across many investments.
  2. Lower transaction costs. Like most forms of commerce, financial trading prices are based on scale - the more you buy the lower the unit cost. Investment funds, with their inherent size, can achieve these economies of scale. Something DIY investors, those investing directly in stocks and shares cannot compete with.
  3. Expert management. Especially in the case of actively managed funds (see below), your investment is being managed and steered by a finance professional. While this doesn't guarantee a return, it can make it more likely and could reduce the risk of a disastrous return.

Active or passive investment funds

Investment funds come in two distinct types. Tracker funds, also known as passive investment funds, simply invest in a set range of assets or a specific stock market and reflect the overall performance of that benchmark. For example, a FTSE 100 tracker fund invests in all the companies listed on the FTSE 100.

Alternatively, actively managed funds are, as the name suggests, more proactive in their approach. These funds are managed by a professional fund manager whose goal is to beat the market and make you more money - but in return their fees may be higher.

Investing your money can be exciting, it can also be daunting. If done well it is nearly always time-consuming! Our financial advisers help our clients invest their money in a way that matches their objectives and monitor their investments carefully throughout the year.

Call us on 0333 241 9900 for more information on how we could help you.


Categories: Investment Insights

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