Funds Guide

Investment Funds are collections of individual investments held by a single organisation (the fund). You, as the investor, will invest in that whole collection of investments via the fund, whose total value will rise and fall as the underlying investments rise and fall.

Funds are a much simpler way of investing than directly owning stocks & shares, so provide an easy introduction to investing. Generally, they have a lower cost of investing and a simpler purchasing process than traditional financial products. The easiest way to invest in funds is via online investment platforms (see our Investment Platforms Guide).

Funds often invest in a range of financial products, including more traditional assets (such as established stocks & shares and government debt) and riskier investments (such as corporate bonds and volatile stocks). They generally have investment themes that dictate their investments and allow you to steer your money towards certain industries or locations. Funds may also indicate a level of investment risk or a level of targeted growth. The decision on which investments these funds make are carried out by fund managers.

Funds can either be active or passive. Passive funds (also known as tracker funds) will try and mirror or track the market. For example, the fund managers will pick stocks that give the same return as the FTSE 100 index (the largest 100 UK shares by total market value). In active funds, the fund managers try to pick investments to beat the market, i.e. they try to choose investments which will have a greater return than passive funds. In comparison to passive funds, active funds are generally more risky, because they may underperform the market, and more expensive, to pay for the fund manager’s expertise.

Types of Funds

There are many different types of investment funds with different legal definitions. In the UK the most common investment fund types are Unit Trusts or OEICs (Open ended investment companies). From the perspective of the investor they both operate in pretty much the same way. When investing in a fund you can purchase or sell units (unit trusts) or shares (OEICs) of the total investment fund. The value of a unit or share is determined by the total value of the investments and is usually set daily.

Both unit trusts and OEICs are open ended, which means they can continue to issue new units or shares, and therefore their price is determined by the total value of their investments (the opposite are closed-end investments, see glossary). There are many other different types of investment funds around the world such as mutual trusts (USA) or UCITS (EU). These operate broadly in the same manner as UK investment trusts.

How to Invest?

Generally, there are three ways to invest in a fund. The first is via an online investment/fund platform. This is a website or online service which allows an investor to buy, sell, and manage their investments (see our Investment Platforms Guide for more details). The second way to buy units or shares is through a financial advisor, who will perform the transaction on your behalf and may also suggest investments which suit your personal situation. The final way is to buy units or shares directly from the fund itself, this avoids the fees charged by financial advisors or online platforms but may come with additional charges and financial/tax complexity (which is beyond the scope of this guide).

ISAs

In the UK many funds can be placed within individual savings accounts (ISAs) to for tax-free investing (currently up to a value of £20,000 per tax year). But remember, you can only open one Stocks & Shares ISA per financial year (see our ISA Guide for more details).

Fees

Funds are generally seen as one of the cheapest ways to invest indirectly in the stock market, but they still charge fees to do so. Every UK and EU fund has to produce a key investor information document (KIID). The associated charges/fees are detailed in the KIID:

• The entry fee is a one-off charge on the amount initially invested.
• The exit fee is a one-off fee on the amount being withdrawn from an investment.
• The ongoing charges fee (OCF) covers the continued running and administration of the investment fund. It is given as percentage of amount invested and is usually calculated on an annual basis.
• The performance fee is a conditional charge, which you will only pay if the fund achieves a certain level of performance (usually measured by a level of return or capital growth within a given time frame).

There will also be a fee levied by the online platform (platform fee) or your financial advisor/stockbroker for handling the transaction and/or managing the investment. Be aware that fees may eat into your potential returns, so you must take them into account when considering investing in a fund.

Accumulation or Income Funds

Sometimes when looking at a fund there are different options (within the same fund) which you can invest in. There is or no little difference in the underlying investments, just differences in the terms and conditions.

Investors can usually choose between income (abbrev. inc) or accumulation (abbrev. acc) funds. Income funds aim to pay out a regular dividend to the investor. Accumulation funds reinvest any profits back into the fund in an attempt to increase the overall value of the fund.

Another useful piece of information is the fund’s Share class, which is usually denoted by a letter within the fund’s name, e.g. J. Blogg Capital Global A Acc. The terms and conditions of a fund generally differ depending on the share class, in order to appeal to different types of investors. For example, some share classes will be aimed at institutional investors (i.e. investing organisations) with lower fees but a significantly higher minimum initial investment.

Risks

Funds are considered to be less risky than shares since they invest in a wide range of companies and financial products (i.e. all your eggs are not in one basket). However, that is not to say that they are without risk. All investment carries an inherent risk of financial loss. Some funds will be riskier than others. For example, funds who invest in specific sectors or countries may be at risk to certain localised events. Some funds advertise themselves as higher risk funds with the potential for higher returns.

The KIID details the risk and reward profile of the investment fund. This is a numerical scale from 1 to 7, where 1 indicates the lowest level of risk and 7 indicates the highest level of risk. The fund’s score will be indicative of how risky the investment is.

How Green?

There is a subsection of funds that advertise themselves as being environmentally-focused. However, it is not always immediately apparent how green/sustainable/clean/etc these firms are.

One of the strongest indications is the investment strategy detailed by the firm. This is a statement and/or document which outlines how the fund invests. This statement usually will indicate in which sectors the fund will invest. That, however, is no guarantee that the fund is investing in a wholly green way. Many funds are, also, independently audited for their green/ethical status. The results of these audits are sometimes displayed on the fund’s website.

Another way to gain an insight into a fund’s investments is by directly looking at the investments they hold. Some funds release a full list of companies that they invest in, allowing you to fully analyse their investments and come to your own conclusion. However, this would be very time consuming and most funds will only release their top 5 or 10 holdings (i.e. their top investments by value). This will allow you to get a snapshot of the fund, but will not provide the complete picture.

One factor to consider is that funds use many different terms to convey how they invest in a environmental or ethical way. Many of these are covered by the umbrella terms of ‘socially responsible investing’ (SRI) or ‘environmental social governance’ (ESG) investing. Beware, just because a fund describes itself as an ethical investor it does not mean it is automatically a green investor and vice versa. See our guide on what constitutes a green investment for more analysis of this issue.