If you are looking to understand how to begin investing in funds easily, this guide will help get you going in no time. You should read this guide after checking out it’s bigger brother – how to start investing in under 10 minutes.
On your marks, get set…
A fund is pooled investment, your money is collected together with other investors in order to buy assets. These assets could include shares (equities), bonds, property or even commodities (such as gold). While a share gives you a slice of a company, a single fund can give you slices of many companies or assets. Like a share, you can benefit from capital growth or income (or both).
Go! Minute 1: fund structures and types
Funds come in three main structures. They can be open-ended structures (including unit trusts and open-ended investment companies), closed-ended structures (investment trusts) or exchange traded funds (including exchange traded commodities).
Funds also come in two main types or approaches to investing. These are active (trying to beat a benchmark or index such as the FTSE 100), or passive (trying to track a benchmark – so if the FTSE 100 rises, your investment rises in proportion).
We don’t go into the details here. But when you are buying an active fund, it is likely to be an open-ended structure (don’t worry about the technicalities). Open ended-structures can also have passive approaches to investing, but exchange traded funds offer a cheaper route. There are less investment trusts around and these are for more specialist investors.
Minute 2: going for growth or income (or both)
Funds will either be aiming for capital growth or income. And you can get both but the growth and or income will take a hit depending on the main focus.
Funds sectors that associated with capital growth are equity funds (funds that invest in shares). There are many sub-sectors here – UK equities, US equities, smaller companies equities and so on. Multi-asset funds can also in shares to various specified percentages but also other asset types such as bonds.
Funds sectors that are associated with income are mainly from corporate and government bond funds or equity income funds. The former is where you will effectively lend money to an entity for an agreed % return in addition to your full initial outlay. The latter refers to investing in shares that meet criteria for the income they provided through dividends.
There are a few other main fund aims and sectors but you should be confident in these first.
Minute 3: picking and analysing your funds
There are initially thousands of funds to chose from. The above step helps narrow things down (i.e. do you want to focus on UK equity funds or bonds). Online brokers will provide more ideas or ‘best buy’ lists, these can be helpful to narrow choices down but they are just tips only – you need to do your own research.
As a minimum you should understand the risk rating contained in the Key Investor Information Document (from 1-7, 7 being highest) and also the the fund fact sheet – this has a wealth of useful information on the fund including the objective, its top 10 holdings and performance.
It’s worth noting there are some shortcuts to doing this include ready-made portfolios (a collection of funds suggested by a broker) or multi-manager funds (a fund that consists of multiple funds but they cost more).
Minute 4: buying your funds, speculate to accumulate
The best account for an investor to buy funds is within a Stocks & Shares ISA – they are tax-free with a £20,000 annual allowance. This account will ‘house’ your funds.
Picking a broker is easy when you know the key charges which we outline in our comparisons (in particular admin fees from brokers for holding shares or fees usually at a % rate).
Now when it comes to buying your funds you will see the option to buy income units or accumulation units. Income units mean you just get paid out the income (like from dividends) whereas accumulation units mean the dividends will be reinvested into the fund and make your holding larger.
As noted earlier, funds (not exchange traded funds or investment trusts) work on a forward-pricing basis so don’t be alarmed when you hear you will not know the exact price you bought at until later in the day or in the following day.
Minute 5: monitor your investments and refine your strategy
It’s important you keep an eye on your investments to see how they are progressing at least monthly and or in line with major economic news. But remember investing is a long-term game.
One of they aspects to consider is the diversification of your investment portfolio and the concept of re-balancing. For example you may have invested with a strategy of 50 / 50 in respect to shares and bonds. If shares do well, your portfolio may then be skewed 80 / 20 to shares. The logic is that you sell off at the high price and then buy bonds at the lower price in line with your desired strategy.
You should also keep an eye on your funds as sometimes it may be time to sell. This could be due to consistent poor performance, a change in fund manager or a change in investment style.