What are smoothed funds?

Investing can sometimes feel like a rollercoaster. One minute the market’s up, the next, it’s down. If the thought of these swings – known as volatility – makes you a little nervous, you’re not alone. That’s where smoothed funds can help.  

Smoothed funds are investment products designed to even out the ups and downs of market performance. Instead of exposing you to daily volatility, smoothed funds aim to provide more stable performance over the medium to long term (usually five to ten years, or more) by ‘smoothing’ investment returns.

Smoothed funds aren’t guaranteed, and although they’re designed to limit the impact of market movements, they aren’t immune to volatility. Like any form of investing, your money can still go down as well as up in value, and you could get back less than you paid in.

How they work

Smoothed funds are generally made up of two key components; a diverse investment strategy, and a smoothing process. The diverse investment strategy aims to spread your money across different assets and geographical areas, ensuring your money’s never overexposed. This might involve stocks and shares, bonds, and cash – in global regions such as the US, Europe, or Japan. This approach make smoothed funds a type of multi-asset fund.

Where smoothed funds differ from other multi-asset funds is in their use of a smoothing process. This aims to provide a steadier rate of return, usually by applying a set daily rate which increases the value of the fund. There may be adjustments to the fund price if markets move too far away from the daily set rate. Not every smoothed fund works like this, but they all follow the same principle. On a technical level, there are a number of rules in place to support the smoothing process. Although this sounds complicated, the overall aim is simple – to cushion the impact of market downturns for you, the investor.

The graph below shows how a smoothed fund could perform when compared to the market, and is for illustrative purposes only. The yellow line highlights the volatility of stock market prices. The purple line shows how a smoothed fund may step up and down, but doesn’t experience the same level of movement. With a smoothed fund you may be protected from some short-term market drops, but this also means you won’t benefit from all of the upsides either.

This chart is not representative of any particular time period or investment performance. Its sole purpose is to illustrate how smoothing works.

Who are smoothed funds designed for?

Smoothed funds are aimed at those with a more cautious approach to investing, those uncomfortable with day-to-day volatility, or even those looking to take an income. If any of these resonate with you, then smoothed funds could be a good match. Of course, everything’s dependant on your circumstances so it’s important to do your own research. Reduced market volatility and steadier growth potential could be useful when planning towards key milestones such as retirement.

Invest in your future with expert advice

Knowing how to invest in way that supports your goals can be 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.

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The advice recommendations we make are from a carefully selected range of products and funds. Using a focused and controlled approach allows us to develop an in-depth knowledge of the products, so we can safely and confidently recommend a solution that’s right for you. This is known as restricted advice.