What’s an investment fund and why use one?

 

If you’re just getting started with investing you might be familiar with the idea of buying shares in a company. That was something a lot of people did in the 1980s for example, when the government privatised organisations like British Gas and British Telecom.   

But another popular way to invest is through a fund. 

For most people, especially if you are new to investing, putting your money into one or more funds is likely to be a more practical option than buying and selling individual investments directly. Funds can help you get the most from your money. They can help you to manage your investment risks more effectively. They also benefit from economies of scale that you couldn’t access yourself.

How do funds work? 

With a fund, instead of using your money to buy shares or other types of investment directly you give it to a professional investor (the fund manager). They pull your money together with lots of others and put it in a range of investments. Everyone in the fund then has an interest in these investments, sharing in the ups and downs. This interest takes the form of shares (or units) in the fund itself.

Getting the most from your money 

With a fund you and the other investors in it are paying an expert to work full time on investing on your behalf, to get the most from the money you have put in it.

Fund managers make their decisions on what to buy and sell, and when, based on a mix of experience, knowledge and insights from teams of professionals who are dedicated to researching investment opportunities.  This means the decisions they make are well informed. 

Even for a confident investor, under your own steam it would be hard work and challenging for you to do what a fund manager does and do it as effectively as they can.

Managing your risks

Fund values can go down as well as up, the same as all investments. But because funds spread your money across a range of underlying investments chosen by an expert, going with one can also help you manage your risks more effectively. 

For example, in a fund that invests in shares the fund manager may choose companies which are different enough (like a house building company compared to a technology firm) to reduce the risk they all fall in value at the same time. 

Different funds invest in different ways and in different parts of the world too, so you can potentially spread your risks even more by spreading your money across a number of different funds.  

Economies of scale

In a fund the costs of researching, buying and selling investments to help make the most of your money and manage your risks are shared between all the investors in the fund. Meaning funds can operate more efficiently than you could on your own. For example they can buy and sell larger amounts of investments for lower costs, helping you and the other investors to benefit from economies of scale that you couldn’t access yourself.

Types of funds

There are lots of types of fund available to choose from. Here are three types that can be popular with people that are new to investing.

Multi-asset funds

Where the fund manager invests not just in one type of investment, such as shares, but in a range of investment types, such as cash, bonds and property as well as shares. 

Multi-manager funds

Where the fund manager invests through a range of other managers, aiming to tap into their specialist knowledge (for example, using a technology sector specialist manager to help the fund choose what technology companies to invest in).

Passive funds

Sometimes also called tracker or index funds. In these the fund manager doesn’t actively choose which investments to pick, but instead sets up the fund to track the movements of a particular market (an example would be the FTSE 100 which is the market for shares in the 100 biggest companies - by value - that you can buy and sell on the London Stock Exchange).

Check the costs

There are costs to investing in funds that you need to be aware of. The most common ones are the Ongoing Charges Figure (OCF), the fund’s transaction costs and any performance or platform fees you might have to pay.

Ongoing Charges Figure

This is an amount you’ll pay the fund manager for investing your money. It’s usually set as a percentage of the value of your investment over a year (0.50% for example) but as its name suggests is actually worked out and collected on an ongoing basis. It pays for the fund manager’s expertise and their costs in running the fund. 

You don’t have to pay the Ongoing Charges Figure (or the transaction costs and any performance fee as mentioned below) as a separate amount. It’s automatically taken into account when the fund manager works out the price of the fund.

Transaction costs

These are costs the fund pays when the fund manager buys and sells investments on its behalf. Not all types of fund must currently disclose these costs, but they are useful to know about when they do.

Performance fee

These can kick in if a fund does particularly well for investors. Like the Ongoing Charges Figure they’re generally set as a percentage of the value of your investment. Not all funds have one.

Platform fee

Many investors access funds through an online investment platform (like the Santander Investment Hub), which will also charge a fee for the services it provides to you.

 

If you use a professional adviser to help you choose a fund you’ll need to factor their costs in too.

Do your research

It’s sensible to do some research before you make any decisions about choosing a fund. Aim to get comfortable with the options you might be interested in, what to expect and the costs involved.

Nearly all funds have something called a Key Investor Information Document (or Key information Document, depending on the type of fund it is) that you can use to help you compare different funds.

Getting professional advice can also help if you’re feeling unsure or if you would prefer someone else to choose funds for you, based on your circumstances and financial needs.