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Funds

16/04/2020

The Basics

What is a fund?

Funds are ready-made baskets of investments managed for you by an expert. A great way to avoid making a clanger by choosing one duff share. Great for investing overseas and for outsourcing the decision making to a professional.

A fund will typically have about 30-60 different investments in it - this spreads the risk around and hedges your bets. Think of it liked buying a mixed case of wine - you don't have to be an expert and someone else picks the contents. They come in lots of different flavours such as global share funds and property funds - you can choose different types to get a good mix. Most investors have betweem about 8 and 16 to get a good mix and spread their bets around.

In a nutshell

• Typically has about 30-60 investments in
• On average will cost about 0.75% a year
• Typically a safer bet than simply buying a few shares
• Buy in an ISA to keep the profits tax-free

Is It Right For Me?

Good if you ...

  • Want a broad mix of different shares
  • Want to invest abroad too
  • Aren't a whizz trader

Not Good if you ...

  • Don't want to pay a fee
  • Want to pick your own shares
  • Want to trade regularly

People like you ...

On average, investors hold

49%

of their investments in funds

The Numbers

The Benefits

• Access to a ready-made, diversified bunch of investments 

• Allows you to invest in a wide range of brands and businesses, bonds, property and more

• Passive funds keep costs of investing this way super low 

• Get a very broad mix of investments from around the world 

The Detail


What sort of fund do I need?

A fund is simply the compilation album of the investing world. It’s a nice way to get someone at the sharp end of finance to pick and manage your investments from the bewildering array of bonds and shares on the market. Let’s give a really simple example. If we ran the Boring Money UK Shares fund (which we don’t) we might look at all the UK shares out there and say that HSBC, Shell, ITV and GlaxoSmithKline make the grade. And add them to our investment mix. But chuck out Barclays and Burberry and Sainsburys. (All random examples by the way, not tips!). Building a fund We’d end up with say 50 shares in our compilation album which we bought for £1 each in our pretend world. So our fund would be worth £50. And we might sell 50 units to people for £1 each. The benefit is that for a small investment of just £1, our investors would have a teeny fraction of an investment in 50 different British companies. And we would run and manage this pool of investments. There are thousands of funds out there, all with different flavours. This means it can be hard to separate the wheat from the chaff. But funds are the best way to get expert help on picking the right investments.

 

 

 

(i) Do you want bonds or shares or property:
Owning a bond is kind of getting an IOU from a government or a company – you buy their bond and you’re lending them money. The dicier the prospect of getting your cash back, the more ‘interest’ they will pay you to compensate for the risk. So an Ecuadorian mining company bond would pay a gazillion times more than the relatively staid UK Government, for example. It’s a riskier loan so they’ll compensate you more for taking this extra risk. Bonds are influenced by interest rates so they’re behaving a bit weirdly at the moment. If you lend the UK Government money for 10 years, they’ll pay you about 1.1%. And inflation is more than 2%. So you’ll see why bonds are feeling a bit “mweh” at the moment. Shares are also known as ‘equities’ or ‘stocks’. If you own shares, you buy little pieces of the world’s biggest companies. And tie your fortunes to theirs. As a rule of thumb, most ‘equity’ funds will have about 40-60 shares in them, although some fund managers have fewer, sticking to their convictions more about which shares are duds and which ones are winners. Shares are also one of the few investments where you can get a decent income. Companies often pay out a share of their profits as dividends. The key is to look for an ‘equity income’ fund. Pick the right one and you could get an income of around 3-4% a year. Quite a few funds will include Vodafone, for example, which currently pays out about 5.6%. Bond or shares? Many suggest diversification which means a sort-of Combo Meal of bonds and shares. Over the long-term bonds are seen as safer and less choppy than shares but many believe they will make you less over the long-run too. As a rule of thumb, if you’re a spring chicken and investing for ages in the future, you should probably look at mostly shares. If you’re getting on and likely to need your money soon, people typically prefer bonds because they’re less likely to crash as dramatically as shares, leaving you high and dry if you need to cash in your investments. Not putting all your eggs in the basket is the mantra.


(ii) How long are you investing for?
Owning a bond is kind of getting an IOU from a government or a company – you buy their bond and you’re lending them money. The dicier the prospect of getting your cash back, the more ‘interest’ they will pay you to compensate for the risk. So an Ecuadorian mining company bond would pay a gazillion times more than the relatively staid UK Government, for example. It’s a riskier loan so they’ll compensate you more for taking this extra risk. Bonds are influenced by interest rates so they’re behaving a bit weirdly at the moment. If you lend the UK Government money for 10 years, they’ll pay you about 1.1%. And inflation is more than 2%. So you’ll see why bonds are feeling a bit “mweh” at the moment. Shares are also known as ‘equities’ or ‘stocks’. If you own shares, you buy little pieces of the world’s biggest companies. And tie your fortunes to theirs. As a rule of thumb, most ‘equity’ funds will have about 40-60 shares in them, although some fund managers have fewer, sticking to their convictions more about which shares are duds and which ones are winners. Shares are also one of the few investments where you can get a decent income. Companies often pay out a share of their profits as dividends. The key is to look for an ‘equity income’ fund. Pick the right one and you could get an income of around 3-4% a year. Quite a few funds will include Vodafone, for example, which currently pays out about 5.6%. Bond or shares? Many suggest diversification which means a sort-of Combo Meal of bonds and shares. Over the long-term bonds are seen as safer and less choppy than shares but many believe they will make you less over the long-run too. As a rule of thumb, if you’re a spring chicken and investing for ages in the future, you should probably look at mostly shares. If you’re getting on and likely to need your money soon, people typically prefer bonds because they’re less likely to crash as dramatically as shares, leaving you high and dry if you need to cash in your investments. Not putting all your eggs in the basket is the mantra.


(iii) Do you want to make life as simple as possible and go for a single multi-asset fund?

‘Multi-asset’ is a little jargon-y, but in practice it means holding lots of different types of investment within one fund. So you might have a little bit of bonds, a few UK shares, a few emerging market shares, a splash of property and so on. It is, if you like, a ready-meal, rather than preparing all the ingredients yourself. The best thing is that instead of you having to decide whether now is the right time to be invested in this or that company, or this or that country, someone does that for you. There are different types of multi-asset fund, but many will come with a handy indication of the type of investors that should consider them. For example, they might be a ‘cautious’ investor. This would only have a small amount in the stock market, with the remainder in less volatile investments such as government bonds. More ‘adventurous’ or ‘aggressive’ options may have a higher weighting in the stock market. You can also get options that pay an income. Once you are up and running with a multi-asset fund, you don’t need to do very much. You can just keep topping up and ignore it.


(iv) Active or Passive?

Most funds in the market are what we call ‘active’. An active fund manager by definition thinks he or she is smarter than the average investor. A clever clogs. They think they can spot a bargain. Spot the dog before others. Identify the region that is about to go belly-up. So they pick and choose. If you buy an active fund which invests in shares, you will usually pay a fee to the fund manager of about 75p- 95p for every £100 you entrust to them. Passive funds are devoid of ego and opinion. They are the well-behaved end of the fund market. Noone makes a call on whether Share A is better than Share B. They simply follow what we call an index, or a list of shares or bonds in any given market. They buy them in proportion to their size and no judgement calls are made. If you buy a passive fund which invests in shares, you will usually pay a fee to the fund manager of about 8-12p for every £100 you entrust to them. It’s a lot cheaper because it’s run by a computer, not an expensive human. The jury is out on which is best. But by definition passive funds will return the average of any market. Some active funds will smash it – others will underperform and charge you for the privilege.


Exchange Traded Funds

ETFs are a low-cost convenient way to get exposure to a region or a type of investment. It's like buying a mixed case of wine which is put together for you and saves you picking all the individual bottles. You just buy the case and let someone else worry about what goes into it!

Here's an example. Imagine you buy an ETF.  A FTSE 100 ETF. With just one trade you get an investment which has the biggest 100 firms in the UK already in it. Proportionate to their size.

Today HSBC is about 7% of the FTSE 100. So stick £100 in a FTSE 100 ETF and £7 of this will be allocated to HSBC shares for you. 

Unfortunately there is often some hieroglyphics to wade through. One of the most popular indices for global markets for example is called the MSCI (a historical coming together of Morgan Stanley with a group called Capital International.) So, for example, the ACWI (All Country World Index) from MSCI is a basket of about 2,500 shares from about 47 countries which lil' ole you could buy with one click. Bear with the jargon and wade through it. Financial people love an acronym or 12!

  • Low-cost – you're not paying fancy-pants investment types to make expensive, subjective decisions - investment charges wont usually be more than 0.1% a year

 

  • A quick way to access major markets – for example the S&P 500 in the US or the FTSE All-Share in the UK

 

  • If you buy this online, most services will charge you a one-off transaction fee of about £10 and no other administration fees

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