How does a fund work?
How does a fund work? (0:39)
You can buy and sell shares one by one, but using a fund gives you a way to buy a group of shares all at once. Depending on what you are trying to achieve with your investments, funds may be a simpler solution. To use a football analogy, if buying a share is a bit like buying Jamie Vardy or Eden Hazard, then buying a fund is more like buying Leicester City, or Chelsea, or the all the players in the Premier League.
Some funds aim to outperform the Share market by holding a group of shares that the fund manager has researched and believes will outperform the market based on their internal processes. Other funds aim to track an index such as the FTSE-100 index of major UK companies or implement a rules-based strategy such as buying a group of shares that appear inexpensive based on valuation.
There are a lot of creative ways that funds are created and used and the list grows each year, but the main thing is that they all will own a group of shares and bonds in the hope of meeting a particular goal for investors.
If you have a relatively small portfolio or don’t enjoy the complexity of picking and researching your own shares then funds can be a good idea. The right funds can provide effective diversification at low cost, and you may end up doing just as well or better than if you’d picked your own shares but for a lot less effort.
Of the various types of funds, we generally prefer Exchange Traded Funds (ETFs) though every ETF is different they are often fairly low cost and many give you a way to achieve global diversification. ETFs can also be bought and sold on a share exchange in a very similar way to shares, which in addition to lower fees in most case can make them relatively easy to buy and sell and tax efficient.