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How to invest in funds 📊

If you're looking for an accessible way to begin investing, funds stand out as an excellent potential starting point. Funds bring you effective, instant diversification and are managed by professionals on your behalf, making them a compelling investment option among all kinds of investors, whether you're just starting or have some experience. Let's dive into how you might go about investing in funds.

Fund definition
Fund definition

What is a fund?

A fund is a pool of multiple different investments, held in one pot, chosen and managed by a financial professional called a fund manager. The fund is managed to achieve specific investment objectives, whether it be capital appreciation, income generation, or a combination of both. When you invest in a fund, you’re buying a part of the fund’s underlying investments. You’ll then receive units or shares in the fund, which are your ownership proportion of the overall pool.

What is in a fund?

Investments held within funds can cover a wide range of assets, such as shares (representing ownership in a business), bonds ( loans to companies and governments), real estate, and other assets. Some funds specialise in holding just one type of asset, while others create a blend, offering a diversified mix within a single fund investment.

Why are funds popular?

Funds enjoy popularity for their appeal to a broad spectrum of investors and experience levels. Their inherent diversification, which is managed and maintained by fund managers, provides investors with a low-cost, convenient way to access a variety of assets, as outlined above, without the need to purchase them all individually. This diversity helps spread risk and enhances the potential for long-term, consistent returns. 

How does this diversification work?

When you buy a fund, you’re investing in a variety of investments in one go. Take the Vanguard FTSE All-World UCITS ETF for example, a popular ETF (Exchange Traded Fund). In this ETF sits over 3,000 different investment holdings in nearly 50 countries, in one single fund. This means an investor gets immediate sector and geographic diversification in a single investment, versus buying a group of individual stocks, such as Apple and Nvidia one at a time (which are held within the fund anyway).

How long should I hold my fund investments?

The optimal duration for investing in a fund depends on individual financial goals, risk tolerance, and the nature of the fund. Generally speaking, investing for long-term growth, on a horizon of at least five to ten years is recommended by most professionals to manage risk, and ride out short-term market fluctuations. However, it's essential to periodically reassess your investment horizon, adjusting it based on any changing financial objectives and market conditions. Consistent, long-term investing often allows for the potential compounding of returns, but flexibility in approach remains key to adapting to evolving financial needs. Remember only to ever invest money you can afford to lose, and ideally, money you won’t immediately need in the event of an unexpected bill for example.

Active vs Passive fund management

Passive and actively managed funds differ primarily in their investment approach and how they aim to achieve returns for investors.

Passive Funds

Objective: Passive funds, like index funds or most exchange-traded funds (ETFs), aim to match the performance of a specific market index, like the FTSE 100 or the S&P 500.

Management: These funds tend to follow a "buy and hold" strategy, mirroring the composition of the chosen index rather than actively selecting individual securities to outperform the market.

Trading: Passive funds usually have lower asset turnover, as they only adjust their holdings when the index they track changes, usually reducing transaction costs and investor fees in comparison.

Fees: Generally, passive funds have lower management fees compared to actively managed funds, due to the above.

Active Funds

Objective: Actively managed funds seek to outperform the market or a specific benchmark, rather than match it. Fund managers and their analyst teams use research and analysis to make strategic investment decisions to reach this goal. Of course, however, this is not a guaranteed outcome.

Management: Portfolio managers actively buy and sell investments, like stocks, based on their assessments of market conditions, economic outlook, and individual company performance.

Trading: Active funds typically have higher turnover, as managers adjust holdings more frequently in response to market changes.

Fees: Due to the hands-on management and research involved, actively managed funds tend to charge higher management fees than passive funds.

Where can I invest in funds?

Funds are one of the most common ways for investors to access financial markets. For investors wanting to buy and sell different types of funds, you’ll need to use an investment platform that offers the access you need. We’ve provided a comparison page for some of the best investment platforms in the market that offer access to ETFs (Exchange Traded Funds) here, one of the most common forms of fund investment. Many of these providers will also offer access to other kinds of funds and investments but do check if their offering has what you’re looking for before proceeding with any account opening.

How to pick the right fund

Choosing the right fund involves careful consideration of various factors to align with your financial goals, risk tolerance, and investment preferences. Here are some of the key steps to guide your decision-making.

Define Your Goals: Clarify your investment objectives. Are you aiming for long-term growth, regular income, or a balance of both?

Assess Your Risk Tolerance: Understand your comfort level with risk. If you prefer stability, consider conservative options perhaps that hold more bonds or cash; if you're more risk-tolerant, you might explore growth-oriented funds with a higher proportion of holdings in emerging markets for example.

Understand Your Time Horizon: Determine your investment time frame. Longer horizons may allow for more aggressive, growth-focused funds, while shorter time frames may prefer stability and conservative gains to manage risk.

Research Fund Types: Explore various fund types, such as equity (stocks and shares) funds, bond funds, or mixed funds. Understand the risk-return profile of each and how they align with your goals.

Consider Fees and Expenses: Compare management fees, expense ratios, and any other associated costs. Lower fees can help contribute to better returns over time, as fees can certainly add up over time.

Look at Historical Performance: Review the fund's historical performance, but remember that past performance doesn't guarantee future results. Consider consistent performance over different market conditions, and also consider the fund's volatility, as this could be a good proxy for overall risk level.

Check the Fund Manager's Track Record: Assess the fund manager's experience and track record. A skilled and experienced manager can contribute to a fund's success.

Diversification: Ensure the fund provides adequate diversification across different assets or sectors to spread risk. It’s a good idea to read the Fund's Prospectus to understand the Fund's objectives, investment strategy, and any specific risks your investment may face, and keep abreast of portfolio rebalancing and changes.

Funds might not be for everyone

Funds may not be suitable for all investor types. Investors need to consider investing only when the fund's goals match their own investment objectives. Before making any investment, individuals should consider the unique risks associated with the fund, and to themselves personally, and ensure that any investment aligns with your risk tolerance and financial circumstances. As always with investing you’ll need to remember that funds can go down in value, so you could get back less than you put in.

What’s the bottom line?

To recap, funds can offer a convenient way for investors to access and build a diversified portfolio effectively and efficiently, with the added benefit of it being managed by professionals. While the inherent characteristics of funds (such as diversification, cost, and accessibility) are certainly attractive, it's crucial to be aware of associated charges, potential shortcomings, and variances between funds. Investors should align fund choices with their financial goals, understanding the specific risks involved. Diversification and regular review of fund performance can contribute to a well-rounded investment strategy, ensuring that funds play a complementary role within a broader and balanced portfolio. That being said, funds may not be suitable investments for everyone, so be sure to consider this against your own personal and financial circumstances.

Want to learn more?

Interested in investing but don’t know exactly where to start? Try the free Pluto app. Learn investing basics, and practise in a risk free environment with no real money. Find us on the Apple App Store.

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