How funds can be a great investment ‘shortcut’

Many investors use collective investments such as unit trusts and investment trusts to build their portfolios. Here’s why.

| 6 min read

Funds, also known as ‘collective investments’ are a convenient way to invest. When you invest in a fund, such as a ‘unit trust’ or ‘open-ended investment company’ (OEIC) you are buying units alongside other investors and investing, collectively, in a portfolio of assets.

Each unit has an individual price called the Net Asset Value (NAV), which is determined by the price of those assets. Unit Trusts and OEICs are much the same thing, apart from OEICs operate as companies whereas unit trusts are structured as trusts.

Investment Trusts offer a similar ‘collective' investment in the form of a publicly traded company with shares listed on a stock exchange and traded throughout market hours.

A brief history of funds…

The first UK fund was launched in 1931 by M&G. Called the 'First British Fixed Trust', it held the shares of 24 leading companies. However, it took inspiration from US ‘mutual funds’, which were introduced in the 1890s.

Investment Trusts are older still. The first, Foreign & Colonial, offered exposure to a portfolio of overseas government bonds – hence the name – in 1868. However, the principle of pooling capital from lots of investors into funds actually all the way back to traders in Amsterdam in the 1770s.

Today, there are several thousands of funds for UK investors to choose from – so why are they so popular?

Save time

Some investors are highly active and enjoy researching and choosing their own individual shares, bonds and other investments. However, it takes time and discipline to monitor the stock market in detail and react appropriately to company news.

Funds offer a useful solution. These spread your investment – and risk – across dozens of different companies and are either managed by a professional fund manager (in the case of ‘active’ funds) or designed to simply track a particular index (in the case of ‘passive’ funds or ‘trackers’). While it can be a challenge to devote enough time to monitor a portfolio of individual shares, it’s a lot easier to keep tabs on a few funds.

Instant diversification

Diversification – spreading a portfolio among various assets – can be time-consuming with individual shares. An equity fund manager typically selects a range, usually 50 to 100, which means less reliance on the performance of any one company. The same applies to other asset types such as bonds; each comes with a level of risk that can be partially mitigated by not having all your eggs in one basket.

A global tracker can, for instance, be a good, basic option for DIY investors when you are not able to spend time researching investments as they tend to provide simple and low-cost exposure to share markets around the world. Investing doesn’t have to be complicated with this sort of product – especially when you are starting out. But remember the value of investments can fall as well as rise; investors may get back less than invested.

Gain a manager’s expertise

Managers of ‘active’ funds decide when to buy and sell stocks in the portfolio. Investing with an experienced fund manager takes away a lot of the hard work. You gain the expertise of professionals with an established investment process in their respective areas.

Fund managers often engage directly with company management and typically analyse a business thoroughly to understand whether its shares represent good value. Although they do make mistakes, they can also sometimes keep you from the major pitfalls within an asset class. The best managers have the potential to outperform the market, though they won’t get it right every time and all investments can fall in value as well as rise.

Invest across multiple asset classes with ease

Using funds means you can easily invest across a range of asset classes, which can help reduce portfolio volatility (the extent of ups and downs) while still aiming to generate decent returns. Alongside equity and bond funds there are more specialist investments in areas such as property, infrastructure assets or commodities.

Unit Trusts and OEICS are categorised by the Investment Association into 45 different sectors, which define the areas in which they can invest. This means investors can easily identify funds that might meet their needs and compare them with each other.

When you select funds, you should understand what each one aims to do and the role each plays in your portfolio, as well as have a good understanding of the objectives and risks involved, so do check the fund’s Key Investor Information Document in particular, and all relevant fund literature, before investing.

If you already have some ideas on where to invest but need some help choosing individual funds, then our Preferred List can help. Our Research Team has created the list to highlight what we consider to be good-quality options in each of the major areas for new investment.

It’s also possible to invest in funds that provide diversification across a range of areas and asset classes rather than targeting a certain one. If you aren’t confident in making investment decisions these ‘multi-asset’ funds could be a convenient solution. For instance, our Multi-Asset Fund range provides diversified portfolios in one easy-to-buy investment, managed and monitored by experts.

Costs can be lower

By pooling your money with other investors you might save money on transaction costs compared to building a portfolio of individual shares, especially for modest-sized portfolios.

Passive funds, which simply aim to provide performance similar to a particular index such as the FTSE 100, are generally cheaper than active ones, but generally won’t outperform the market they are designed to follow in the longer term – however, neither should they significantly underperform it. A range of passive fund options that we believe offer good value are also featured on our Preferred List.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

How funds can be a great investment ‘shortcut’

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Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.