Learn About Investing
In many ways, a fund can be seen as the financial equivalent of a box of assorted chocolates.
The creams, caramels and pralines have been selected for you, and you buy the whole box, not the individual chocolates.
Likewise, with a fund the assets (chocolates) that go into the fund (box) are pre-selected. Investors buy a share in the whole thing, without having to make decisions about which individual assets to pick.
The best known funds are equity funds made up of a mix of shares. But they aren’t the only sort. Bond and property funds are widely available. So are funds that mix different assets – bonds with shares, for example.
The number of items inside the fund varies. Some funds may focus on just a dozen or so individual investments, while others are made up of hundreds.
Investment funds issue shares (or units) to investors. Each one represents a portion of all the assorted investments in the fund. In other words, a bunch of investments are pooled together into a single object. So instead of buying lots of individual investments, you can buy shares in a single fund.
The fund itself is run by a fund manager. This individual, or team of people, is responsible for selecting which assets go in the fund. They charge a fee for their services, which is taken out of the fund itself. You aren’t presented a bill to pay. The value of your investment is correspondingly reduced instead.
What types of funds are there?
Funds come in different legal shapes. Unit trusts and OEICs (open-ended investment companies) are most common.
Generally, unit trusts and OEICs are only bought or sold daily. If you miss the deadline to buy or sell, you have to wait until the next working day.
When shares in OEICs and unit trusts are sold, the price of a share reflects the combined value of the fund’s assets. The technical term for this is ‘Net Asset Value’ (NAV). Open-ended funds can only be bought and sold at their exact NAV at a certain time each day. Shares (or units) in such funds can be created or cancelled to match demand from investors.
Less well known are ‘closed-ended’ funds, which include Investment Trusts. These funds differ in that they are divided into a fixed number of shares that can be traded on stock markets throughout the day. These shares may differ in price from the NAV. This means the total value of all the shares in the fund may not match the value of all the assets held by the fund. Any such ‘discount’ or ‘premium’ is down to expectations about future performance of the fund.
ETFs are traded on exchanges like closed-ended funds but are structured in such a way that the supply of their shares increases in response to greater demand - and decreases when demand is slack - allowing them to trade more closely to NAV.
Funds give you the opportunity to invest in a range of companies and spread risk even if you have quite small amounts to invest.
The Investment Association
Fund supermarkets and discount brokers can considerably reduce your investment costs. However, not all of them will offer you the same level of discounts and the fees you pay can still vary significantly.