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What is the typical growth rate of an investment fund?

David | Greater London| 07/09/2017 | 7

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David's question in full

I have a bit of excess money to play around with and I have been looking at Investment funds. What is the typical % growth rate of an investment fund?

Cherry Reynard's Response

This question is being asked more and more often. Disillusioned with the rates on savings accounts, people are looking for alternative options when they have a bit of cash to spare. The stock market, and more specifically, collective funds that invest in the stock market, are generating more interest.

 

With that in mind, most people want to know the type of return they can expect, as they would with, say, a saving account. The problem is that stock market returns bounce around like a toddler on a Haribo high. Some years, you might get 20%, the next year, you might lose 30% and it’s not always easy to predict when you’ll get what.

 

Nevertheless, a few things are easier to judge. First, if you have a diversified portfolio of larger companies, you will probably receive a decent dividend stream – somewhere between about 3.5-4%. This is not guaranteed, but does not tend to vary in the same way as the capital value of a stock market investment. Plus, it is money in your pocket and a higher income than you can generally get elsewhere.

 

In terms of the capital value, past performance is not guide to future performance, as the regulator is fond of reminding people. However, looking at historic returns might give some impression as to the type of returns you could expect over time. An investment in the FTSE All Share index – a good proxy for the stock market as a whole - has given you a return of 10.1% every year for the past five years. This sounds pretty impressive, but it lost around 50% from mid 2007 to early 2009, so was starting from a low point.

 

Many investors who are starting out simply plump for the market return, opting for a tracker fund that simply aims to replicate the performance of an index such as the FTSE 100. However, active managers – where there is real live person in charge of selecting the shares to go in an investment fund - might give you a higher return. Over the same period, the FundSmith Equity fund has given its investors a return of 21.4% per year. Fund managers such as Neil Woodford (of Woodford Investment Management) or Nick Train (of Lindsell Train) might boast similar returns.

 

The trouble is, you might also have been invested in the M&G Recovery fund, which has only made 3.6% over five years and has fallen an average of 1.44% in each of the past three years. Picking the fund likely to do well isn’t easy.

 

At the risk of repeating ourselves, it is worth bearing in mind a few key rules when investing in an investment fund: Little and often is a good idea. Putting money into the market regularly means that you reduce the risk of putting it in at the top of the market and then seeing big losses. Start with a well-diversified portfolio – don’t make the classic first-time stock market investor mistake of betting all your cash on some technology company that promises to make oil out of hen’s feathers. Also, make sure you shelter your money from tax, where possible by using a stocks and shares ISA. If you need some pointers, we have some thoughts here.

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Cherry Reynard

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