What can I invest in? Funds for beginners

What can I invest in? Funds for beginners

A fund is a pool of money that comes from investors big and small. It is placed with an investment company which invests it on the individual investors’ behalf.

The fund aims to deliver returns back to the investor via capital growth (the value of the investments rising) or income (from dividends), or both. At the same time, it seeks to reduce risk for investors by spreading money across different asset classes or a number of different shares. For this service the fund will charge a fee – so investors need to see returns that make that fee worthwhile.

There are many sorts of funds and many ways to classify them and it can all be incredibly confusing. We will try to cut through some of the jargon below.

What can I invest in? Funds for beginners

Managed versus passive funds

Some funds are managed by investment professionals who choose where to put the pool of money in order to deliver a return that beats the overall market, as represented by an index or benchmark. For instance, a UK equity fund will typically be compared to the FTSE 100 index. Alternatively, some funds just passively ‘track’ the benchmark index – so they are also called tracker funds. The fees on tracker funds are typically much lower than on managed funds – so the challenge for managed funds is to deliver superior returns that justify their higher fees.

‘Normal’ funds versus investment trusts

When someone says ‘fund’ they are usually talking about something called an open-ended investment company, or OEIC. As more people buy into it, the fund gets bigger, so very popular funds end up being enormous. But another type of fund is an investment trust, which also takes money from investors and invests it for them – but it itself is a company that is listed on the stock exchange. So the investor buys shares in the fund on the stock market. The shares should move according to the value of the trust’s investments – but they can also be swayed by stock market sentiment. They are run in a similar way to managed funds and sometimes there will be two versions of a fund available – an open-ended ‘normal’ fund and an investment trust. You don’t get passive investment trusts.

What about exchange traded funds or ETFs?

These are a little bit like passive investment trusts! They are very similar – and in many case indistinguishable from - passive or tracker funds. There are trackers and ETFs for all the major stock markets for instance and they will often perform almost identically. But ETFs are a stock, with shares traded on the stock market, while a tracker is set up like a fund, which builds a portfolio reflecting a particular index. ETFs are popular because there are a huge number and variety of them meaning that investors can get exposure to all sorts of obscure markets, sectors and countries.

But hang on, aren’t there equity funds and income funds too?

OK so funds (and we are talking about managed funds here) are also categorised according to where they are invested and what their goals are. Equity funds for instance will be largely (though not necessarily totally) devoted to shares, while bond funds will be largely placed in government debt (or the debt of companies). Income funds will be focused on earning regular interest or dividends, while growth funds are focused on the capital growth of the shares.

Balanced or diversified funds, meanwhile, will be spread more evenly across asset classes. You could get various combinations of these fund adjectives. But to really find out what a fund is about you just have to find the relevant page on your investing platform’s web page devoted to the fund. There will be a section on where the fund is invested as well as its aims, objectives and past performance. And remember all investments carry a degree of risk - the value of the investments and income from them may go down as well as up and you may not get back the amount originally invested. 

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