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The basics of funds

In this episode, Clare talks us through the basics of funds - one of the most popular types of investment. She explains what they are, how they work, and the benefits and drawbacks of investing.

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 independent advice.

Hello I'm Clare and welcome back to Smart Investor, the series that helps you get to grips with investing. If you've decided to take the plunge and invest for the first time it can be quite a daunting prospect with so many options to choose from. So in this episode I'll be taking you through the basics of funds one of the most popular investment products. Please be aware though we can't offer personal advice so if you don't feel confident about making an investment decision on your own do seek independent financial advice.

You've probably heard of some of the world's most famous investors, Warren Buffet in the U.S. for example or Neil Woodford here in Britain. The big names generally made their reputations by running funds. But what are they and how do they work? At a basic level a fund is an investment product that allows a large number of people to pool their money in order to invest in a range of different holdings such as company shares and bonds. Your money is combined with that of other investors and used to buy, sell, and hold investments with the aim of increasing the value of the fund.

One of the biggest advantages of funds is that they enable you to build a diversified portfolio quite quickly because you will exposure to a large number of different companies within each fund you hold. Diversification can help you reduce the risk of investing because you aren't dependent on the performance of one or two companies. Compare this with buying shares in an individual firms yourself and it's easy to see how a fund can help spread your investment risk immediately. That said, when it comes to investing it's important to understand that there is always some risk and you could potentially lose money. However with a long term outlook, at least five years or preferably longer and a diversified portfolio giving you exposure to a range of different companies, sectors and geographical regions, you will hopefully generate a better return than if you just kept your money in cash.

Another benefit of investing in a fund is that you don't have to worry about which shares to buy and sell as the fund manager will do that for you. It's still important to monitor how your fund or funds are performing but you probably only need to do that a few times a year so it should be less time intensive than investing in individual shares. However there are literally thousands of funds to choose from. They have different investment objectives for example some prioritise generating an income over capital growth and some are actively managed by a fund manager while others track a stock market index the performance also varies significantly. It's therefore really important to think about where you want to invest and what you're trying to achieve before deciding on which fund to go for.

We have lots more information about funds on our website including how to buy and sell them which should help improve your knowledge and understanding, enabling you to make your first investment decision with confidence. Thanks for watching and see you next time.

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