Five reasons to consider funds

Many investors use collective investments such as unit trusts and investment trusts to build their portfolios. Rob Morgan explains why.

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  1. Rob Morgan

When you invest in a Unit Trust or Open Ended Investment Company (OEIC) you are buying units alongside other investors. Each unit has an individual price called the Net Asset Value (NAV). Unit Trusts and OEICs are both types of ‘fund’. They are much the same thing apart from OEICs operate as companies whereas unit trusts are structured as trusts.

Investment Trusts offer a similar ‘collective’investment in the form of a publically traded company with shares listed on a stock exchange and traded throughout market hours.

A brief history of funds…

The first UK fund was launched in 1931 by M&G. Called the 'First British Fixed Trust', it held the shares of 24 leading companies. However, it took inspiration from United States ‘Mutual Funds’, which were introduced in the 1890s.

Investment Trusts are older still. The first, Foreign & Colonial, offered exposure to a portfolio of overseas government bonds – hence the name – in 1868. However, the principle of pooling capital from lots of investors into funds goes all the way back to traders in Amsterdam in the 1770s.

Today, there are several thousands of funds for UK investors to choose from – so why are they so popular?

Save time

Some investors are highly active and enjoy researching and choosing their own individual shares, bonds and other investments. However, it takes time and discipline to monitor the stock market in detail and react appropriately to company news.

Funds offer a convenient solution. They spread your investment – and risk – across dozens of different companies and are either managed by a professional fund manager (in the case of ‘active’ funds) or designed to simply track a particular index (in the case of ‘passive’ funds or ‘trackers’).  While it can be a challenge to devote enough time to monitoring a portfolio of individual shares, it’s a lot easier to keep tabs on a few funds.

Instant diversification

Diversification – spreading a portfolio among various assets – can be time consuming with individual shares. An equity fund manager typically selects a range, usually 50 to 100, which means less reliance on the performance of any one company. The same applies to other asset types such as bonds; each comes with a level of risk that can be partially mitigated through not having all your eggs in one basket.

Gain a manager’s expertise

Managers of ‘active’ funds decide when to buy and sell stocks in the portfolio. Investing with an experienced fund manager takes away a lot of the hard work. You gain the expertise of professionals with an established investment process in their respective area.

Fund managers often engage directly with company management and typically analyse a business thoroughly to understand whether its shares represent good value. Although they do make mistakes, they can also sometimes keep you from the major pitfalls within an asset class. The best managers have the potential to outperform the market, though they won’t get it right every time and all investments can fall in value as well as rise.

Invest across multiple asset classes with ease

Using funds means you can easily invest across a range of asset classes, which can help reduce portfolio volatility (the extents of ups and downs) while still aiming to generate decent returns.  Alongside equity and bond funds there are more specialist investments in areas such as property, infrastructure assets or commodities.

Unit Trusts and OEICS are categorised by the Investment Association into around 35 different sectors, which defines the areas in which they can invest. This means investors can easily identify funds that might meet their needs and compare them with each other.

If you already have some ideas on where to invest but need some help choosing individual funds then our Foundation Fundlist can help. Our Research Team has created the list to highlight what we consider to be good-quality products in each of the major areas for new investment.

It’s also possible to invest in funds that provide diversification across a range of areas and asset classes rather than targeting a certain area. If you aren’t confident in making investment decisions these ‘multi-asset’ funds could be a convenient solution. For instance, Charles Stanley’s Multi Asset Fund range provides diversified portfolios in one easy-to-buy investment, managed and monitored by experts.

Costs can be lower

By pooling your money with other investors you might save money on transaction costs compared to building a portfolio of individual shares, especially for modest-sized portfolios.

Passive funds, which simply aim to provide performance similar to a particular index such as the FTSE 100, are generally cheaper than active ones, but generally won’t outperform the market they are designed to follow in the longer term – however, neither should they significantly underperform it. A range of passive fund options that we believe offer excellent value are also featured on our Foundation Fundlist.  

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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