Funds are a simple way to invest your money and equally popular with investors who are starting out and those with lots of experience behind them. Funds enable you to pool your money with other investors, in a range of asset classes, at a cost far lower than doing it yourself.
Funds can be active (run by a team of fund managers and analysts) or passive (that track an index like the FTSE 100). They can invest in a single asset class, such as cash, bonds, equities, property or commodities or across multiple assets. For example, you could invest in an active fund, where a fund manager would decide which individual shares to invest in, or a tracker/passive fund, where the fund automatically invests in most of the companies in a given index. You own units in the fund, and the fund itself owns the underlying shares in the companies.
Funds deliver two key benefits
1. Easy diversification
Investing in a fund enables you to spread your money across a range of companies. This reduces the pressure of managing your own investments and ensures you don’t have all your eggs in one basket.
2. Low cost
You’ll pay a lot less to invest through a fund. Firstly, a fund can negotiate lower fees when buying shares and pass these discounts onto you. Secondly, you’ll pay less tax. Every time you buy and sell shares as an individual you are liable for capital gains tax. Through a fund there is no tax liability when shares are sold – you only pay tax when you decide to exit the fund. And, this doesn’t apply if you have all your shares in an ISA or pension (well done you!).
What are the benefits of investing in a fund over individual shares?
- A fund gives me the ability to invest in a large number of different companies and is low cost
- A fund allows me to invest in a small number of companies
- I can do lots of research and pick the companies that I think are going to beat the market
Don’t forget, while funds offer lots of benefits, it’s still important to spend time understanding which fund and which asset class is right for you. Read this article on passive vs active investing for more info and make sure your money is working as hard as it can for you.
Quiz answer: 1
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is not a reliable guide of future performance.