Introduction to Funds
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A golden rule in the investment world is to spread your money around aka diversify. It's a seriously good way to reduce your risk. But, choosing different companies to invest in can be a tedious task. Enter funds. With one investment your money is spread across many different companies, industries and even countries. It’s almost too good to be true (but trust us, it is).
Backup please. What exactly is a fund?
It’s a goodie bag of investments which have been purchased using a pool of money from hundreds or thousands of people. That means thousands of people can be the owners of a fund. The Fund Manager makes the day-to-day decisions on what investments are made.
Why should it be on my radar?
Because you’re likely already using one. Nearly all pension schemes invest into funds so even if you’re not shopping for a fund now, you’ve already paid into one as part of your long term investment plan (hurrah!). They can also be a great way to invest past your pension and, unlike your retirement fund, you can access it before you are 55.
Tell me again why they’re so great
It’s an easy, instant way to spread out your investments and means you don’t have to make a lot of decisions. Even better? After you decide which fund to invest in, the fund manager will do the work for you (score!). Your job is to check in every so often to see how your fund is performing. Easy peasy.
As with anything that makes life simpler, you have to pay for the convenience. The fund charges a yearly fee known as Ongoing Charges Figure (OCF) or Total Expense Ratio (TER). This pays for the Fund Manager’s expenses and expertise. for providing the service. It is charged as a percentage of your total investment, ranging from 0.1% to 2% a year (that is, £10 to £200 for every £10,000 invested).
Your broker charges an annual fee as well. Whilst the broker is not managing your money they are providing you with a platform and all the administration that comes with it. The fee is a percentage of your investment but, unlike the OCF fee, it is usually capped. You can find a list of broker fees here.
Side note: Other fees to look out for are one-off fees such as entrance (or initial) and exit or switching fees. These should all be made very clear on the fund’s information page.
So how do I actually invest in a fund?
Funds are available online from a number of places including your bank or stock broker. Each fund has a unit price and you can decide how many units you want to buy. For example, say the fund ‘The UK’s Top Businesses’ costs 130p a unit (or £1.30) and you buy 1,000 units, your total investment size is £1,300.
Your online broker account will share loads of information about each fund to help you make your choice. It’s easy to set up, deposit and invest in a fund – we swear! To avoid paying tax on your profits you can open a Stocks & Shares ISA and buy into a fund through that account.
Do I need a lot of £££ to invest in a fund?
Not at all. Some funds allow you to start with as little as £100 and you can choose to add to this each month. You should be prepared to invest for a minimum of five years because if a fund experiences a bad year or two you may need time to ride it out.
What should I look for when choosing a fund?
There are a number of things to consider. You’ll need to go through a checklist to decide. We have a guide for this.
How much money can I make?
A medium-risk fund may aim to return 5% a year on average. Meaning, if you invest £10,000 and keep the yearly profit in the fund your investment will be worth £12,800 after five years and £16,300 after ten years. Note: This hasn't deducted any fees so you’ll actually take home less.
Other one-off fees to be aware of are entrance (or initial) and exit or switching fees. These should all be made very clear on the fund’s information page.