Investment Funds Explained: A Simple Guide for New Investors

What Are Investment Funds?

Imagine you and your friends want to buy something expensive together. Instead of each buying a small part separately, you pool your money and buy it together. Investment funds work just like that, but with stocks and bonds.

An investment fund is a way of putting money together with other investors. A professional manager then uses this pooled money to buy a mix of investments. This approach allows everyday people to invest in a wide range of assets they might not be able to access on their own.

Why Do Investment Funds Exist?

Most people don't have the time, knowledge, or resources to carefully choose individual stocks or bonds. Investment funds solve this problem by bringing together money from many investors and having professional experts manage the investments.

Think of it like a group cooking project. Instead of each person trying to prepare an entire meal alone, you work together. One skilled chef (the fund manager) helps everyone create something better than they could individually.

Types of Investment Funds

1. Mutual Funds

These are funds managed by experts who choose which stocks and bonds to buy. They try to make more money than the overall market. Sometimes they are successful, sometimes they're not.

A fund manager will research companies, economic trends, and market conditions to make investment decisions. They aim to pick investments that will grow in value or provide regular income. However, even the most skilled managers can't predict the future perfectly, and often they underperform the market. And remember, the fund manager needs paying whatever the result is, and that can be quite expensive.

2. Index Funds

These funds simply copy a specific market index, like the FTSE 100 (the top 100 companies listed on the London Stock Exchange). They aim to match the market's performance, not beat it.

An index fund is like taking a snapshot of the entire market. If the FTSE 100 goes up by 5%, your index fund will also aim to increase by around 5%. But remember, this also means if the market goes down by 5%, your investment will go down too. This approach is typically cheaper because it doesn't require constant active management.

3. Exchange-Traded Funds (ETFs)

These are like index funds but can be bought and sold easily throughout the day, just like individual stocks. They offer flexibility and often have lower fees compared to traditional mutual funds.

Benefits of Investing in Funds

Spread Your Risk

Instead of putting all your money in one company, funds spread your investment across many different companies. This means if one company does poorly, it won't hurt your entire investment.

Imagine putting all your eggs in one basket versus spreading them across multiple baskets. If one basket drops, you don't lose everything.

Save Time and Effort

Most people don't have time to research individual stocks. Fund managers do this work for you, using their expertise to make investment decisions. They spend their entire working day analysing markets, companies and economic trends.

Affordable Investing

Many funds let you start investing with just a few pounds each month. This makes investing accessible to almost everyone. You don't need to be wealthy to begin building your investment portfolio.

Tax-Efficient Investing

Some investment accounts in the UK let you invest without paying tax on your profits. This can help your money grow faster.

Some tax-efficient options include:

• Stocks and Shares ISA: Allows you to invest a certain amount each year without paying tax on gains

• Pension accounts: Offer tax relief and can be an excellent long-term investment strategy

• Junior ISAs: A way to start investing for children with tax advantages

What You Need to Know

• Just because something made money before doesn't mean it will again

• Putting money into anything carries some chance of losing it

• It's safer to spread your money around instead of betting on one thing

• Think about what you want your money to do for you

What's Coming Soon

In future posts, we'll cover:

• Getting to grips with what investments are

• Exploring what you're investing in

• Understanding some of the jargon

• Avoiding common investing mistakes

• You'll learn what your attitude to risks are

Stay tuned as we help you build your investing knowledge!

Further thoughts

We're just getting started on your investment journey. If you still find this a bit confusing, don't worry - we'll be helping you feel comfortable with this. Investment can seem complicated at first, but we're here to break it down into simple, manageable steps.