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
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 between about 8 and 16 to get a good mix and spread their bets around.
On average, investors hold 49% of their investments in funds
Multi-Assets funds are a great way to have a diversified portfolio and can be likened to an investment ready-meal. They consist of different investment assets such as shares, bonds, and property - 100s of investments sitting in one convenient fund or product. The benefit of these options is that you get someone else to make the decision about whether to tweak the allocations by geography and investment type. It's the simplest way to get a broad mix which spreads your bets around.
The illustration on the left compares a popular multi-asset fund, Vanguard LifeStrategy 80%, to investing in just UK shares over the last 5 years. Spread across different countries, roughly 80% of the fund is made up of shares and the remaining 20% is bonds. It's typically a good idea not to have all your money in the UK and get a broad mix of regions and investments.
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
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.
1. 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.
2. 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.
3. 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.