When you invest in a fund you’re buying a slice of a range of different investments conveniently in one place
If you’re looking for an easy and convenient way to invest, funds are a great place to start. They offer instant diversification and professional management. This makes them a popular choice for both novice and experienced investors, although we always recommend investing for at least 5 years.
A fund is a collection of investments, chosen and run by a fund manager who’s trying to achieve the fund’s investment objective. This could be to grow investors’ capital, or provide a decent level of income.
You’ll receive units, which are your proportion of the overall pot. Funds can be invested in many different types of asset, like shares (which represent part ownership of a business), bonds (which are loans to companies and governments) and property. Some are focused on just one type, and some a mixture.
When you buy a fund, you’re investing in a variety of investments at a relatively low cost.
If you bought 50 or 100 shares yourself, you’d find a big chunk of your money eaten up by dealing fees and other costs. In a fund you share these costs with all the other investors.
Funds can also let you invest in things which are hard to buy directly – for example shares listed on overseas markets, commercial property or commodities like oil.
As always with investing you’ll need to remember that funds can go down in value, so you could get back less than you put in.
Active and passive management
Actively managed funds are run by a fund manager and team of analysts. They choose the fund’s investments, making changes as needed to keep the fund performing as well as possible. Ideally these funds look to outperform the stock market and other competing funds although there's no guarantees.
Passively managed funds (also known as tracker funds) take a different approach. Rather than trying to do better than the stock market, they track it. So their performance is tied to the ups and downs of the market they’re following.
Both types have their advantages. With no active manager or analysts to pay for, passive funds usually have lower fees. But there’s no potential for outperformance either.
The two main types of fund
There are two common types of funds – unit trusts and open-ended investment companies (OEICs).
- Unit trusts are funds that are set up as trusts, and they usually have a buy (‘offer’) and sell (‘bid’) price. The difference between these is known as the bid-offer spread.
- OEICs are funds that are set up as companies, and they usually have just one price.
You might see these types referred to, but for most investors the differences aren’t important.
Income and accumulation
Many funds offer different types of unit (or share). The two you’ll see most often are income and accumulation. Some funds offer both types of unit, others offer only one.
With income units, you’ll be paid any income the fund’s investments make (like dividends from the companies the fund invests in, for example).
With accumulation units the income is automatically reinvested into the fund. You don’t receive an income payment – instead the income increases the price of each unit. If you’re investing to grow your money in the long term, you’d usually buy accumulation units.
Dealing in funds
Unlike shares, which are traded continuously when the stock market is open, funds are usually traded once a day.
Each fund has a daily ‘valuation point’, normally at 12 noon. At this time the manager works out the value per unit of the fund’s investments. This is the price at which units are bought and sold. If you place an order to buy or sell a fund, it’ll go through at the next valuation point. This means you won’t know the exact price beforehand.
If you invest in a fund, you’ll pay an ongoing charge to the company managing the fund. This is referred to as the ongoing charges figure (OCF) or total expense ratio (TER), depending on the type of fund. It’s shown as an annual percentage, but is calculated daily and factored into the price of the fund. In rare cases funds also carry a performance fee, paid to the manager if certain targets are met.
You can find full details of a fund’s charges in its Key Investor Information Document.
As well as the fund’s charges, you’ll also pay an annual fee to the company you use to hold your investments. We charge up to 0.45% a year. Full details of our charges are on our website.
Find out more about our charges
Next - How to choose funds