Back to school – back to basics on investing

03 September 2021

5 minute read

We explore the fundamentals of investing.

Who's it for? Investors with basic investment knowledge

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • Different types of investments explained
  • Understanding various investment strategies
  • Tips for constructing your investment portfolio.

As children return to the classroom with new parts of the curriculum to explore, newcomers to investing might like a teach-in of their own - on the basics of investing.

There has been a rising number of new starters heading off on their investment journey with Smart Investor account openings up by 88% in 2020, when compared to 2019, and more people choosing to take control of their money. Many more could be planning to follow in their footsteps.

Here are some of the fundamentals you need to know to help you get started on selecting investments for your ISA, general investment account or pension portfolio.


Instead of buying shares in individual companies you can invest in a fund which offers the opportunity to invest in lots of different companies. Money is pooled with that of other investors and in the case of an actively managed fund, is invested on your behalf by a fund manager.

The job of an active fund manager is to pick and choose investments, with the aim of delivering a performance that beats the fund’s stated benchmark or index.

Together with a team of analysts and researchers, the manager will ‘actively’ buy, hold and sell shares in companies to try to achieve this goal.

Investors in actively managed funds will have to pay annual charges for the expertise of the fund manager, usually anywhere between 0.6% to 1.5%.

Alternatively you might choose a fund which is run by a computer. Known as passive or tracker funds, they buy everything in an index that the fund is tracking.

One of the most commonly tracked and quoted indices is the FTSE 100, which is an index of the UK's 100 biggest companies based on share value.

A FTSE 100 tracker fund will buy shares in all 100 companies and in the same proportions as their market value. The value of the fund therefore, will move in line with the change in the value of the FTSE 100 Index.

Passive funds are typically much cheaper than active funds. Some carry an annual management charge lower than 0.1%.

Specialist passive funds called Exchange Traded Funds (ETFs) differ as they are bought and sold on a stock exchange, just like shares.

But you should consider your own situation and whether you think active managers can help you achieve your goals; just because a fund is cheaper doesn’t mean it’s better.

Investment strategies

Active fund managers use a number of different investment strategies and principles that suit the goals of different investors.

Income funds

Many firms pay dividends - a portion of the company's profit that it gives to shareholders.

Income fund managers seek out and invest in companies that they see as having the potential to pay consistent and growing dividends.

Income funds are often favoured by those who need to receive a monthly income - such as retired people or those who need to supplement their income.

If the dividends are reinvested (by choosing an accumulation version of the fund) they can boost returns over time, thanks to “compound growth”. This refers to the fact you can generate returns or income from previous income that’s been reinvested. More information about fund accumulation and income units.

These funds can usually be identified by the word ‘income’ in the fund name, which is sometimes shortened just to just ‘Inc.’ Take care not to confuse an ‘Inc’ fund with a fund that doesn’t have an income strategy but does offer units which pay out any income the fund earns. You should always read the fund’s KIID (Key Investor Information Document) or factsheet where you’ll find details of the fund’s objectives and strategy.

Growth funds

Growth fund managers will typically choose to invest in companies that they believe will be able to grow their earnings over time. They focus on firms that reinvest their dividends in their business rather than paying out profits to shareholders.

Some managers prefer to invest in smaller and medium-sized companies, believing there is more opportunity for growth.

Some growth funds use the word ‘growth’ in the fund name – though many don’t. Again, make sure you read the fund’s KIID which will detail its objectives and strategy, or look at the factsheet.

ESG funds

Some funds are dedicated to driving change for a more sustainable and better world, which means investors can choose investments based on personal values and preferences.

‘ESG investing’ is where the focus is on backing companies with strong credentials when it comes to environmental, social and governance (ESG) matters.

For the ‘E’, the focus would be on businesses dedicated to the environment by developing cleaner energy, sustainable transport as well as reducing plastic waste.

Under the social part of ESG, the focus is on a company’s treatment of staff and suppliers, and to what extent it upholds employment and human rights.

Governance relates to issues include ensuring fair leadership of the business, matters of executive pay and its stance on shareholder rights.

‘Impact investing’ goes a step further to invest only into the companies that are then creating a product or service that has a positive measurable social and or environmental impact – often aligned to the UN Sustainable Development Goals - alongside a potential financial return.

ESG and impact funds are usually easy to spot with their names typically including ‘responsible’, ‘sustainable’, ‘impact’ or something more specific such as ‘environmental’. The fund factsheet will clarify more. Find out more about ESG investing and you’ll find many such products in our ESG fund list where we’ve tried to identify them for you.

Now that you have learned some of the basics of investing, here are five top tips for constructing your portfolio:

  • Take time to understand the risk level you are comfortable with
  • Diversification is important as it can reduce the risk of your portfolio. Invest in a mix of asset classes – that is, different investment types such as shares, bonds, cash and property with varying risk – as well as across geographical regions and industries - or in a diversified fund to make this easier
  • Don’t chase performance. Beware of buying companies or funds just because they have done well recently. Strong past performance is no indication of how it will fare in the future
  • Know that day-to-day fluctuations are normal. While you should check on your investments, it is not good practice to look at the value of your investments or individual share prices every day. It’s the long-term trends that are more important
  • Consider and understand the cost of your investments.

Ready to invest?

Smart Investor allows you to choose your own investments for your ISA, general investment account or SIPP.

With so much choice, a good starting point is the Barclays Fund List which is made up of a number of funds from each of the investment sectors we believe are key for helping to build a diversified portfolio. The list includes a number of options for investors interested in ESG.

For investors that prefer to avoid having to select their own portfolios, it’s worth considering a diversified investment fund, which invests across multiple markets.

The Barclays Ready-made Investments (RMI) is just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Another option for ISA investors with at least £5,000 to invest, but want us to manage the investments for you, is our Plan & Invest service.

We create a personalised investment plan that’s tailored to your goals.

Your investments will be chosen and managed by our dedicated team of investment experts. There are over 10,000 different investment options which is why your plan will be truly personalised.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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