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Investing can feel complex, but it doesn’t have to be. Whether you're just starting out, or refining your strategy, having a sound understanding of investment funds is important.
What is an investment fund?
An investment fund pools money from multiple investors to buy a diversified portfolio of assets – such as stocks and shares, bonds, property, or cash. A single fund can hold hundreds, or even thousands, of different investments. This helps spread risk, meaning if one type of investment performs badly, others could offset it.
Different funds use different strategies. For example, some aim to grow your money by taking on more risk, while others favour a more conservative approach to protect you from potential downside. What’s right for you will depend on your risk appetite, goals, and individual circumstances.
You can invest in funds through tax-efficient accounts such as a pension or ISA, meaning any returns you make are shielded from tax depending on individual circumstances.
Why choose an investment fund?
A big reason for many is simplicity. Funds offer a quick and easy way to invest, without having to worry about managing things yourself. They can also give you access to a broader range of investments than you might be able to afford or access on your own.
And because they’re managed by professionals, you don’t have to keep on top of things on a day-to-day basis like you may otherwise need to. In a nutshell, they offer a convenient way to invest, without being too hands on.
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Types of investment fund
- Multi-asset and single-asset funds
- Passive funds
- Active funds
- Smoothed funds
- Specialist funds
Multi-asset funds invest in a mix of asset types
For example, it might hold a portion of investors’ money in stocks and shares, with the rest held in bonds. Others may concentrate on property, keeping a smaller percentage as cash. It’s a ‘don’t put all your eggs in one basket’ approach, which aims to spread risk – as different asset types can perform differently in changing market conditions.
On the other hand, single-asset funds concentrate on just one type of asset
For example, this might involve investing solely in stocks and shares, or in property alone. This gives more concentrated exposure, which could be beneficial if the chosen asset class performs well. However, the reverse is also true – if it performs badly, you could be left more exposed. Single-asset funds come with the cost of less diversification.
Passive funds aim to replicate the performance of a specific market index, instead of beating it
For example, a passive fund might track the FTSE 100 – the 100 biggest companies in the UK, or the S&P 500 – the 500 biggest companies in the US. It doesn’t try and cherry pick specific companies, but rather buys the entire index, allocating money proportionally based on each company’s size.
In other words, a higher percentage of the passive fund will be given to the largest companies on the index, and tailored down to each subsequent company accordingly. Passive funds are typically lower-cost, in part because there’s no fund manager making active decisions.
Active funds are managed by fund managers
They’re responsible for which investments are held within the fund, making decisions based on their knowledge and expertise. They’ll conduct research and analysis to try and outperform the market.
For example, if they deem a technology company to have a promising piece of new software in the pipeline, they might invest a portion of the fund in that company. The aim is to try and generate better returns. On the flipside, if a certain company isn’t performing well, they might decide to sell. They might also look at wider political or societal changes that could affect investments. In short, you’re relying on the fund manager’s expertise to guide your investments – and that can often mean higher charges.
Smoothed funds are a type of multi-asset fund
They aim to ‘smooth’ out the daily ups and downs – known as volatility – of market performance. By doing this, they’re designed to provide more stable returns over the medium to long term (usually five to ten years, or more). Think of them like trying to even out bumps along a road to provide a steadier journey.
This is achieved by spreading your money over diverse geographical regions and asset types, alongside technical processes which are managed by professionals – to provide more consistent rates of return.
Although you may be protected from some short-term market drops, this also means you won’t benefit from all of the upsides either. It’s also important to know that smoothed funds aren’t guaranteed – although they’re designed to cushion volatility, this doesn’t mean they’re entirely immune.
Some funds specialise in a particular industry or theme
An example being ESG (environmental, social and governance) funds, which focus on companies that operate responsibly, ethically and sustainably. Funds like this can help align your investing approach with certain values or interests you may hold.
Other examples include funds which invest solely in the likes of tech or healthcare companies. There are a wide range of varieties to select from, spanning a variety of sectors. Specialist funds can be passive or active funds.
Your appetite for risk
This looks different for everyone. Some people are comfortable taking on more risk in the hope of greater rewards, others aren’t. It all comes down to personal preference, as well as your individual needs and goals. The important thing to know is that there are investment solutions available to cater for all preferences.
Thinking about how you view risk personally, and the percentage of your net worth you’re willing to take more or less risk with, is a good starting point. Financial advice can help.
Need expert help?
Wrapping your head around the ins and outs of investment funds can feel complicated. There’s a lot to consider, and the best fit for one person won’t necessarily be appropriate for the next. Expert financial advice can take the worry out of the equation.
Knowing you’ve got someone in your corner sourcing the right solutions can make the world of difference – both for your money, and your peace of mind.
