Making investment decisions on behalf of the investor
There are many reasons to invest through a fund, rather than buying assets on your own. At a basic level, investing in a fund means having a fund manager make investment decisions on behalf of the investor.
You receive reports on the fund’s performance but have no influence on the investment choices short of removing your money from the fund and placing it elsewhere.
Spreading risk is one of the main reasons for investing through a fund. Even if you have a small amount to invest, you can have a lot of different types of assets you’re investing in – you’re ‘diversified’.
You can spread risk across asset classes (such as bonds, cash, property and shares), countries and stock market sectors (such as financials, industrials or retailers).
Reduced dealing costs by pooling your money can help you make savings because you’re sharing the costs. There is also less work for you, as the fund manager handles the buying, selling and collecting of dividends and income for you. But of course, there are charges for this. They also make the decisions about when to buy and sell assets.
Active or passive fund management
Most pooled investment funds are actively managed. The fund manager is paid to research the market, so they can buy the assets that they think might give a good profit. Depending on the fund’s objectives, the fund manager will aim to give you either better-than-average growth for your investment (beat the market) or to get steadier returns than would be achieved simply by tracking the markets.
Passive management – tracker funds
You might prefer to track the market – if the index goes up, so will your fund value – but it will also fall in line with the index. A ‘market index tracker’ follows the performance of all the shares in a particular market. In the UK, the most commonly used market index is the FTSE 100, a group of the 100 biggest companies based upon share value.
If a fund buys shares in all 100 companies, in the same proportions as their market value, its value will rise or fall in line with the change in the value of the FTSE 100. Funds that track an index are called ‘tracker funds’.
Tracker funds don’t need to be managed so actively. You still pay some fees, but not as much as with an actively managed fund. Because of the fees, your real returns aren’t quite as good as the actual growth of the market – but they should be close.