If you’re new to investing, or simply looking for convenient, low-cost exposure to shares and bonds, an index tracker fund (also known as a passive fund) could be right for you. These funds aim to replicate, or track, the performance of a stock market index. This is in contrast to an actively-managed fund that will aim to beat the performance of an index.
In the UK, for example, the FTSE All Share is an index of over 600 large, medium-sized and smaller companies. A tracker fund will often invest in every company in the index. This simple approach costs very little and should result in performance that is very similar to the index, although fees will cause the tracker fund's performance to deviate from the index over time. This is why costs are an important consideration, you should also consider plaform charges.
An active fund will invest in just a few companies in the index, perhaps as little as 30-40, and the aim is to select the companies with the best potential in order to deliver performance that is much better than the index over the long term. This approach is more complex. It involves a great deal of research and costs are higher. We believe there are relatively few good active fund managers around and our favourites can be found on the Wealth 150+.
Some investors prefer the simplicity and low costs associated with tracker funds. There's still plenty of choice on offer, from funds that focus on the UK to those that invest further afield, such as the US and Asia. All tracker funds can be held in an ISA, Lifetime ISA (LISA), SIPP (pension) and a Fund & Share Account.