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 pick 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.
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. Other funds could be investing for income, so they’ll choose companies that pay out dividends. You’ll need to choose funds with objectives 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
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.
