How do investment funds work?
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I’m thinking of starting to put money into stocks and shares but am confused about how I go about this. I’m not sure what to invest in. I don’t want to pick specific companies’ shares – I’d like to spread my money across a range of companies. A friend suggests I go for investment funds. Can you explain how funds work, please?
Phil Beck of Smith & Pinching responds:
Investment funds are primarily known as collective investments. This means that your money is combined with other investors’ money and used across a spread of investments, often with a common theme and/or source. Having a spread of investments in different funds improves diversification, ensuring you don’t have ‘all your eggs in one basket’.
You must bear in mind that investing always comes with a degree of risk. Different investments have different levels of risk and it’s important to only take as much risk as you are comfortable with. Higher risk may bring the potential for higher returns, but there is also the risk of greater losses. You must consider risk together with your objectives for the investment, always bearing in mind that stocks and shares are typically used for long-term investing.
Funds are managed by the providers, who seek to maximise growth for investors in the fund. This means that the actual contents of the funds will change on a regular basis, within agreed parameters. As well as market-wide investments, themes for funds could be geographic – such as UK companies – or sector-specific, such as property or oil, or by something that identifies them like sustainable investments or emerging companies. Fund investing is typically delivered through an investment platform. This is a place where fund units can be bought and sold by the investor.
Choosing funds isn’t something the amateur can easily do, so you may like to invest in a managed portfolio that is suitable for you in terms of your investment risk profile and your objectives, and which will contain a mix of investment funds. A portfolio manager will buy and sell fund units within your portfolio to optimise performance with an aim to meet or exceed an investment benchmark, such as the FTSE 100.
There will be fees and charges levied by fund managers, platforms and portfolio managers, so it is important to compare these before making any decisions. I recommend that you take independent financial advice to help you to identify your investment goals and build an investment strategy to meet your needs, using the platform, funds and portfolio management that is appropriate for you.
Any opinions expressed do not constitute advice. The value of your investment can go down as well as up and you may get back less than the amount invested. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk