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  • Why funds are the foundation to a diversified portfolio

    We look at why funds are an important stepping-stone on your path to diversification success.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    We’ve already looked at how important diversification is to your long-term investing success.

    Investing can be complicated and a bit overwhelming at times. For most of us, we don’t have the time, resources or experience to be full-time stock pickers.

    If you’re looking for an easy and convenient way to invest, funds are a great place to start. They’re managed and run by a professional so you benefit from their expertise, knowledge and research. Whether you’re new to investing, or have been in the game a while, they’re a great foundation to a portfolio for instant diversification.

    This article gives you information to help you build and maintain a diversified portfolio, but it isn’t personal advice. If you’re not sure of the best course of action for your circumstances get advice. Our advisory service could help.

    Why choose funds?

    A fund is an investment that pools together money from lots of individuals. The fund manager then invests the money in a wide range of investments like UK shares, overseas shares or bonds.

    When we think about our core-satellite model, funds should make up the core of your portfolio. They’re the foundations to your long-term investing success.

    Investing in funds means your money is spread across multiple assets, so if the value of one investment held within the fund goes down, other investments could stay the same, or go up. This helps spread the risk and smooth the ups and downs so the total value of the fund isn’t affected as much.

    If you bought shares in 50 or 100 different companies yourself, you’d see a big chunk of your money eaten up by dealing fees and other costs. In a fund, these costs are shared with other investors.

    There’s a world of opportunity when you invest in funds too – you’ve got access to things that are hard to get your hands on directly. This could be shares listed on overseas markets, property or commodities like oil or gold.

    Investing in funds isn’t right for everyone though. Remember, investments go down as well as up in value, so you could get back less than you put in.

    Things to think about

    We know there are different ways to diversify, the basics being to:

    • Think globally – the best (and worst) performing stock markets usually change each year. By spreading your investments around the world, you’ve got a better chance of making your investment journey a lot smoother.
    • Think types – different types of investments have different risks and rewards. Shares generally offer more reward, but are more volatile than other investment types, so it’s important to think about holding other assets like bonds. Investment types don’t always perform the same, that’s why it’s usually best to have a mix.
    • By choosing to invest in funds, it can cover both of these diversification basics.

      Each fund will have its own set of goals, and the fund manager will select investments to hold within the fund to reach those objectives. For example, a fund's objective could be for growth by choosing investments they think will do well over the long term. Others could be for income, so they’ll choose companies that pay out dividends. You’ll need to choose funds that align with your own.

      They use a range of strategies, so some are more cautious or adventurous than others. Choosing a more adventurous fund could give you more reward, or bigger losses – it can be a bumpy ride. You should check your portfolio matches how much risk you’re willing to take when you invest.

      Funds can also invest in a particular area. That means the fund manager will focus the investments the fund holds, to specific companies or investment types they expect will make profit in that area. This is known as a sector.

      How is the fund managed?

      When you choose to invest in funds, you have two options on how you want the fund to be managed – actively, or passively.

      Active funds are a collection of investments, or a collection of other funds, chosen and managed by a professional manager or company – they’ll do the day-to-day management within the fund. Active funds aim to outperform an index, though charges are higher to reflect the work involved by fund managers.

      It’s important to remember to review your portfolio every so often to make sure the funds objective still align with your goals too, as they might change over time.

      You can also invest in index tracker funds, which are designed to track the performance of a particular stock market or index, like the FTSE 100 or S&P 500. Passive investments such as tracker funds aim to match the performance of an index and are generally lower cost.

      Whether you choose a fund that’s actively managed by a professional, or one that tracks an index, by choosing one fund you’ve already spread your money so much further than investing in one share or bond.

      Ready to start diversifying?

      Our Investment research team have put together some investment ideas to help you get started with diversifying a portfolio. They are not a personal recommendation to buy.

      You could look for diversification with a fund that includes different investment types across lots of geographies.

      Mixed investment funds can be a good way to start holding a variety of investment types too. They usually blend shares and bonds in different proportions.

      Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

      Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

      Remember, investments go up and down in value so you could get back less than you put in.

      Investment ideas

      Legal & General International Index

      • Invests in thousands of companies around the world.
      • Gives access to sectors like technology, financials and healthcare.
      • One of the simplest ways to invest.

      Find out more

      Find out more

      Troy Trojan

      • Made up of a mixture of different investment types.
      • Investments from around the world.
      • Could bring some stability to a more adventurous portfolio.

      Find out more

      Find out more

      Legal & General International Index

      A global tracker fund could offer instant diversification to a long-term investment portfolio.

      Tracker, or index, funds try to track the performance of an index, instead of trying to beat it.

      The Legal & General International Index aims to track the performance of the FTSE World ex UK Index. It’s made up of markets like the US, Japan and Europe, but also includes some higher-risk emerging markets like Korea and Taiwan. The fund can also invest in derivatives, which can increase risk. Because of the size and strength of the US stock market at the moment, American companies make up almost two-thirds of the fund.

      The fund invests in around 2,200 companies, across sectors like technology, financials and healthcare. It mainly focuses on some of the world’s biggest and most established businesses.

      The fund is managed by Legal & General, one of the largest providers of tracker funds, with plenty of resource and expertise to try to track the market as closely as possible.

      An index tracker fund is one of the simplest ways to invest. This fund could be a good addition to a broader investment portfolio aiming to deliver long-term growth.

      More about this fund, including charges and how to deal

      Legal & General International Index Key Investor Information

      Troy Trojan

      Investing in a number of different companies isn’t the only way to diversify a portfolio. Different investment types could help too.

      Total return funds could be a good choice as a balanced option because they’re more conservative. They normally hold a mix of shares, bonds, commodities and currencies. This could offer modest growth over the long term and help shelter money when stock markets fall. But they aren’t likely to keep up with stock markets when they rise quickly.

      Troy Trojan is run by experienced fund manager Sebastian Lyon. Part of the fund invests in shares of well-established companies in countries like the US and UK and some smaller companies too, which can be more volatile. The rest invests in UK government bonds and US inflation-linked bonds, which could provide some shelter from rising inflation. It also holds gold and cash, which can help offer some stability when times are tough in the economy and stock markets.

      Overall the fund holds a small number of investments. This means each one can have a meaningful impact on the performance, but it does add risk.

      The fund could form part of the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.

      More about this fund, including charges and how to deal

      Troy Trojan Key Investor Information

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Learn more about investing

    Category: LEARN ABOUT INVESTING

    Should I save or invest?

    Category: Investing essentials

    Diversification: what you need to know

    Category: Investing essentials

    Risk: what you need to know

    Category: Investing essentials

    Investing behaviours: what you need to know