Here we look to dispel some of the jargon and confusion surrounding ‘Funds’, breaking them down, with no nonsense explanations in an attempt to help you understand this strategic investment.
Starting out?
Starting out?
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Many newcomers to equity investment are nervous about investing in individual firms – and with good reason. Putting all your money into a few stocks is a high-risk strategy, especially for the inexperienced, because it leaves you vulnerable to sharp fluctuations in the share price of the individual stocks you pick, not the markets in which they trade. If you get it right and pick winners, great. But if you pick a couple of big losers, your whole portfolio will be scuppered. Collective or ‘pooled’ investments can diversify your holdings and therefore reduce that risk.
Why pooled funds?
Many newcomers to equity investment are nervous about investing in individual firms – and with good reason. Putting all your money into a few stocks is a high-risk strategy, especially for the inexperienced, because it leaves you vulnerable to sharp fluctuations in the share price of the individual stocks you pick, not the markets in which they trade. If you get it right and pick winners, great. But if you pick a couple of big losers, your whole portfolio will be scuppered. Collective or ‘pooled’ investments can diversify your holdings and therefore reduce that risk.
Why pooled funds?
Unit trusts, open-ended investment companies (Oeics, pronounced ‘oiks’) and investment trusts are all vehicles that let you pool your money with lots of other ‘retail’ – or small – investors. (In the US, this kind of investment is known as a ‘mutual fund’.) The pooled money is then invested on your behalf in a wide range of different equities by specialist fund managers. (There are also funds that invest in bonds or other assets, such as commercial property or commodities.) The fund manager takes a fee to run the fund and research what stocks to buy.
If they get it right, it means you get access to a highly diversified range of stocks at a reasonable cost. It also gives you easy access to asset classes and international markets that would otherwise be difficult and/or expensive to invest in. For example, specialist funds are available that invest only in Japan, or Latin America, or only in technology firms, and so on. Also, different funds are designed to meet different investment objectives and there’s a wide range to choose from. Some aim for income, some for capital growth, and some for a balance of the two.
Unit trusts and Oeics
If they get it right, it means you get access to a highly diversified range of stocks at a reasonable cost. It also gives you easy access to asset classes and international markets that would otherwise be difficult and/or expensive to invest in. For example, specialist funds are available that invest only in Japan, or Latin America, or only in technology firms, and so on. Also, different funds are designed to meet different investment objectives and there’s a wide range to choose from. Some aim for income, some for capital growth, and some for a balance of the two.
Unit trusts and Oeics
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