A fund pools together money from many different investors and uses it to buy company shares, bonds or other investments. This is why it's known as a collective investment .
The aim of the fund is to make money for its investors. It might try to do this through buying and selling investments to make capital gains, or by collecting regular income from dividends or interest payments.
Investing in a fund is different from investing directly in shares or bonds. Each fund has its own objective, eg:
- Deliver growth by investing in UK companies and emerging markets
- Generate income by investing in UK government bonds
- Deliver growth and income by investing in companies that pay high dividends
A professional Fund Manager makes decisions about which individual investments the fund should hold. They also monitor the funds to keep it on track with its objectives.
Why invest in funds?
Whether you’re just starting out or a more experienced investor, funds can offer many advantages. As with all investments, it's also important to be aware of the risks and charges.
- Diversify your portfolio and reduce potential risk
Funds hold a range of investments, spreading your risk in a way that buying shares in a single company can’t. They might invest across a range of asset classes , markets or geographical locations. Even funds that invest in just one market or location offer diversification, by investing in a range of companies. However, diversifying doesn’t mean that your money is safe – all investments carry risk and you could get back less than you invest.
- Managed by experts
Fund Managers keep a close eye on how the fund is performing. They use their expert knowledge, experience and the latest market research to make decisions on your behalf, freeing up your time. Fund management does come with a cost and you should factor this in when choosing investments.
- No fixed maturity date
Most funds continue indefinitely, so you can invest for as long as you like. Though as with any investment, you should look to hold funds for at least 5 years. Selling earlier than this could increase the chances of you losing money. And remember, no matter how long you hold investments for, you could get back less than you invest.
- Easy to manage
Researching and monitoring lots of different investments can be complicated, particularly if you’re just starting out. Because funds are managed for you, they’re an easier and popular option. Remember though that you do pay for fund management, and you should take this into account when choosing investments.
There are a few different types of funds available. The most common ones are known as unit trusts or OEICs. With these types, your money goes directly to the fund for the Fund Manager to invest. When you decide to leave the investment, you sell your units or shares back to the fund.
There are some other types of funds that work in a different way – Exchange Traded Funds (ETFs) and Investment Trusts . These are listed on the stock exchange and are bought and sold in the same way as individual shares.
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