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What is a fund?

As an investor, you want your money to grow for you and your family’s future. But sometimes it can be difficult to have confidence in your investment decisions when you don’t have the time to master the financial markets by yourself.

A fund can help take some of the pressure off investors, providing them with a diversified portfolio that’s built and managed by a team of experts.

What is an investment fund?

A fund is an investment vehicle that allows you to pool your money together with other investors, to invest in a range of different assets. The fund will aim to grow in value or provide you with a regular income.

It’s not up to individual investors to decide the fund’s strategy, set out the asset allocation or pick the investments; this responsibility falls to the fund manager.  

By investing in a fund, investors aim to access a more diverse range of assets, greater investment expertise, and lower trading fees than if they invested on their own.

Different types of funds

Funds have been around for many years and have evolved into different guises. Today, different types of investment funds include exchange traded funds, mutual funds, and hedge funds.

A mutual fund is an open-end fund, which means it has no limit to how many people can invest in it. When investors add money to the fund, new shares are created; when investors withdraw their money, shares are retired. They are typically priced only once a day, which means they can be difficult to trade and may often lack transparency.

Closed-end funds, on the other hand, act more like shares on the stock market, with a fixed number of units that can be traded over an exchange. These funds are mostly actively-managed, and the shares can be traded in seconds, which means they offer more flexibility and transparency than mutual funds.

Active vs Passive

When it comes to investing in funds, the active versus passive debate is prominent.

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It’s important that you understand exactly what you want from your investment to make sure your goals match what you’re investing in. 

Investors who want to outperform the general market will choose to put their money in an actively managed fund. In this case, the fund manager’s team analyse the markets for investors and invest in the assets it thinks will help the fund grow in value. This comes at a price, however, and the expensive management fees often associated with actively managed funds can eat into investor returns.

Passive investments are an alternative to these expensive funds. These funds aim to track and replicate the returns of an index, specific commodity bond, or basket of assets.

Passive funds still offer exposure to a diverse range of assets, but because they aim to replicate the returns of a market, they usually come with much lower management fees.

What is an ETF?

Exchange-Traded Funds (ETFs) are a low-cost, simple and transparent alternative to expensive actively managed funds. They are similar to closed-end funds, but are passive investments, can create and redeem shares, offer more transparency, generally don’t use leverage – unless specified – and are lower-cost.

The right investment for you

To make sure you’re on the right track to reach your financial goals, your investments need to reflect your investor profile and attitude to risk. Finding the right fund for you might take time, experience, knowledge and skill. 

It’s not easy to understand your investor profile, either – it depends on what you’re investing for, your time horizon, attitude towards risk and financial history. 

At Moneyfarm we match you to an investor profile and investment portfolio. This investment portfolio is specifically built and managed in line with your investor profile to help you get one step closer to your financial goals.

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As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest.