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This is a beginners guide to investment funds. However, please note that the value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

What are investment funds?

Funds are ‘pools’ of money from many different investors that are used to buy a range of company shares, bonds and other assets. By pooling money with other investors you can take advantage of investment opportunities more easily than if you bought the individual assets yourself. The pool of funds is managed by (surprise surprise) a Fund Manager and they will use their knowledge, experience and research to grow the collective pool of funds by buying and selling investments when the time is right.

Investing in a fund is different from investing directly in shares or bonds. Each fund takes a calculated approach and invests in a range of assets. That means they’re typically lower risk because the fund will normally be able to invest in a wider range of companies that an individual would typically be able to do. But handing over your hard-earned cash to a fund manager doesn’t mean you don’t have decisions to make. In fact, the main decision you’ll have to take is which fund to go within the first place. Funds can be focused on specific industry sectors, geographic locations and even asset types (for example – property). By asking for advice from a financial adviser, such as Credius, we can help in making the right decision for you, based on your current circumstances.

Clear objectives of these funds

• Deliver growth by investing in UK companies and emerging markets
• Generate income by investing in UK government bonds
• Deliver growth and income by investing in companies that pay high dividends


Points to consider when selecting a fund to invest in

And that’s not all – here are some other points to consider before making your fund choice.

Age of the fund

Do you want a fund with an established track record or would you rather get in early with a new fund launch? It’s worth remembering that past performance is not a guide to what might happen in the future.

Size of the fund

This indicates the fund’s popularity and past success at attracting investors. However, some funds can be so large it’s difficult for the fund manager to run it and that means it might be a less attractive investment. A small fund is sometimes easier to manage.

Fund manager tenure

Consistent fund performance often relies on a fund manager having managed it for some time. But watch out – star performers can change jobs.

Independent ratings

Companies such as Morningstar, Standard & Poor’s and Moody’s provide independent ratings for funds’ performance, creditworthiness and consistency of management and are a great place to research specific funds once you’ve narrowed down your search.

Charges

Look closely at all the fund charges and the penalties for withdrawing your money. Tiny differences in the percentage charged for fund management could cost you thousands, if not tens of thousands of pounds in the long run.

It takes time, experience, knowledge and skill to work out which fund could be right for you. To help you make a decision, it’s beneficial to understand how the fund you invest in, gets managed.


How are these funds managed? – Active vs Passive Funds


Now after giving you a brief introduction to what a fund is. We’re now going to talk about two different ways that your fund can be managed. This is something that you’ll need to take into consideration when choosing a fund. Funds can be managed actively or passively so let’s take a look at what that means…

Actively managed funds

Actively managed investment funds are run by professional fund managers or investment research teams who make all the investment decisions such as which companies to invest in or when to buy and sell different assets on your behalf. They have extensive access to research in different markets, sectors and often meet with companies to analyse and assess their prospects before making a decision to invest.

The aim with active management is to deliver a return that is superior to the market as a whole or, for funds with more conservative investment strategies, to protect capital and lose less value if markets fall. An actively managed fund can offer you the potential for much higher returns than a market provides if your fund manager makes the right calls.

Passively managed funds

‘Passive’ tracker funds still have a manager, but the underlying investments are selected automatically in line with the fund’s objectives. Most passive funds track an index like the FTSE 100 or Standard & Poor’s 500 (S&P 500) but the aim isn’t to beat it, it’s simply to match it. To achieve this, the fund will usually invest in all the parts of the market sector. So if the relevant market sector falls or rises by 30%, the fund should too. The charges for this type of fund tend to be lower because there’s less day-to-day management involved.

So why choose passively managed funds – surely if you want to make money, having an actively managed fund is a no-brainer?

It’s easy to think that but the reality is that few active fund managers are able to consistently outperform the markets they aspire to beat. Even if you choose a fund that has consistently out-performed the market in previous years, there’s no guarantee it will do it again in the years to come, so whilst there is a chance that you could make significantly more money with an actively managed fund, that chance is matched by the risk of your fund not performing well at all.

One of the biggest drags on the performance of an actively managed fund is the costs. For the privilege of getting an expert fund manager, you have to pay much higher fees than you would with a passive investment fund. That means that not only does the fund manager have to outperform the market, but they need to do by a margin that is sufficient enough to swallow their fees and still leave you better off. For many managers, this proves too challenging over the long term.

Having said that – actively managed funds wouldn’t exist if there weren’t some winners so don’t rule out the option before finding out more.

Click here to have a look at our Investment page for further information on other forms of investments available.


Three popular Fund Classes – Unit Trusts, Investment Trusts and OEICs


So far, we’ve introduced you to the idea of funds and explained how different funds can be managed. Next, in continuing our journey, we’ll be looking at the three popular classes of fund – Unit Trusts, Investment Trusts and OEICs.

Unit Trusts

With a Unit Trust, a Fund Manager pools money from many investors and buys bonds or shares in companies on the stock market on behalf of the fund and will make all of the decisions around what to buy, what to sell and when to do it. The fund is split into units… hence the name – and this is what you’ll buy (and perhaps sell). When investing in unit trusts, you buy units at the offer price and sell at the lower bid price.

The difference in the two prices is known as the spread and to make a return on your investment the bid price must rise above the offer before you decide to sell … sounds a bit confusing, doesn’t it?
It’s for this reason and complexities around the legal structure of Unit Trusts which have led to their demise in recent years, as they rapidly get replaced by their modern-day counterpart – OEICs.

OEICs (Open Ended Investment Companies)

OEICs (pronounced ‘oiks’) operate in a similar way to Unit Trusts except that the fund is actually run as a company in its own right. This means, instead of buying units in a fund, you buy shares in the OEIC. When it comes to selling your shares, it’s a far less complex affair when compared to selling units in a trust. Whatever the share price is on the day of the sale, that’s what you’ll get… “simples”. OEICs also tend to have lower management fees.

Returns from both Unit Trusts and OEICs are paid through distributions which can be monthly, quarterly or every six months, depending on the type of fund that you invest in. These distributions derive from the dividend payments received by the fund from the underlying shares within which they invest, or interest payments from bonds or even rental income in the case of property. It goes without saying that the fund manager will take their management fee before passing a distribution on to the end investor (you).

Investment Trusts

Investment Trusts are the elder statesman of the investment world and have been around since the late 1800s. Like an OEIC, an Investment trust is set up as a company – however, the big difference is that the company is floated on the London Stock Exchange. As with any company quoted on the stock exchange, investment trusts have to publish an annual report and audited accounts.

They also have a board of directors to which the manager of the trust is accountable and which looks out for the shareholder’s interests. When you invest in an investment trust, you become a shareholder in that company and that means you’ll get paid a regular dividend based on the company’s performance.
Investment trusts can be appealing as they generally have lower annual charges than unit trusts and the potential for higher returns. They can also invest in a wider range of securities.


Identifying the right fund for you


So how do you know which type of fund is right for you? Well, with so many variants of a fund to choose from, the best place to start is by speaking to a qualified professional such as a Financial Adviser for advice that’s right for you.

Here at Credius, we’ve got a great team ready to help you – so why not call us today on 020 7562 5858 or email us at info@credius.com. We’d love to hear from you.

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