If you feel you do not have the time, knowledge or inclination to manage your own portfolio of investments, you can delegate responsibility for managing your money to a professional fund manager. When you buy a fund or collective investment, you pool your capital with other savers and pay professional money managers to make investment choices on your behalf. You pick the asset class, geography or theme and then let them get on with it.
One of the major advantages of funds is that they enable you to build a diversified portfolio. By investing even just a few hundred pounds in a fund, you can usually obtain exposure to far more stocks or bonds than you can by investing directly in the market yourself. In addition, funds enable you to gain access to an array of geographical markets around the world, a variety of specialist asset classes and a range of industry sectors.
Investing in funds will usually involve taking on a certain degree of risk. Learn more about understanding your risk profile here.
There is also a tax benefit of funds. In the UK, switches between shares within funds are free of capital gains tax (CGT) for the saver. This is not the case if you manage a portfolio of shares unless these are held in tax efficient wrappers such as Individual Savings Accounts (ISAs). We suggest you consult a professional adviser about the tax implications of your investments.
There are two main structures of funds – open ended and closed ended. The former are split between unit trusts and open ended investment companies (OEICS) while the latter comprise investment trusts.
Open-ended funds: You can invest in or redeem cash from open ended funds at any time. Fund managers create shares or units for new investors and cancel them when they are redeemed. This means that the size of the fund can increase and decrease depending on investor demand – they are open to subscriptions and redemptions. The price an investor pays is based upon the actual value of the underlying assets (called the net asset value or NAV).
Closed-ended funds: The closed-ended funds, also known as investment trusts, are structured as listed companies and trade like any other equity on the stock market. They are “closed” in the sense that, once created, they are typically not open to subscriptions and redemptions. They have a limited amount of shares available and any buying and selling has to be carried out in the open market. This means these funds’ prices can differ from the NAV. The price of the fund is determined by investor demand as well as gains or losses in the underlying assets. The price you can pay for a share, therefore, can either be more or less than what it is actually worth (known as trading at a premium or a discount to NAV). For a fund manager, a closed-ended fund has the benefit of stabilising the amount of money with which they invest and can make this structure a better fit for slower moving, less liquid asset classes such as property.