How to buy funds when looking to start your investment journey is likely to be a key question. Luckily, like buying shares, it’s a simple process.
What is an Investment Fund?
When buying shares, you will opt to buy a slice of a company. When buying funds, you will buying a slice of multiple companies or assets in a fund, that is run by a fund manager. As a collective investment, your money will be pooled with other investors – giving the fund manager large amounts of capital to buy shares or assets in the fund.
Your stake in the fund is reflected in ‘units’ – each unit of the fund has a price (which can rise or fall just like shares). The price of each unit multiplied by the number of units you own shows the value of your investment.
Why Should I Invest in a Fund?
Investing and buying funds are popular among investors because of some of their characteristics:
- Portfolio Diversification – As a fund manager will invest in multiple companies or assets, you will be diversifying your portfolio rather than relying on the performance of a handful of shares. This can reduce your portfolio risk.
- Fund Manager Expertise – An active fund manager will be actively seeking opportunities to enhance the performance of the fund, it’s their full-time job!
- Choice – Linked to portfolio diversification, funds can give you an easy way to invest globally, within different assets such as property and in specific sectors.
How can Funds make me Money?
Just like shares, funds can make you money either by the value of the investment going up (the price) or income being distributed to you in the form of dividends or payments.
When buying funds – you will have the option to by ‘income ‘ or ‘accumulation’ classes. The former pays out income and dividends directly to your account, whilst the latter uses the income and dividends to put them back into the fund, increasing the value of each unit held.
What Type of Funds can I Buy?
Loads! Some online platforms or fund supermarkets will make available over 2,000. There are many different types of funds, but at a high level, you should be aware of the two main categories:
- Active Funds – These are funds actively managed by a fund manager who is picking companies or assets to outperform a ‘benchmark’ or an ‘index’.
- Tracker Funds – These are funds that look to track rather than outperform a benchmark or index. A fund in this case may look to adequately ‘track’ the performance of the FTSE 100 (the largest companies on the London Stock Exchange).
Opening an Account to Buy Funds
Like shares, the options for accounts to hold funds in are similar. You can either chose from a standard dealing account, or a tax-efficient wrapper such as a Stocks & Shares ISA or Self-Invested Personal Pension (SIPP).
It is best-practice utilise your generous Stocks & Shares ISA allowance of £20,000 per tax year before considering a dealing account. This is because it is free of tax on capital gains and dividends.
Selecting Funds to Buy
Investors are spoilt for choice when selecting funds. Fund supermarkets will often have ‘best buy’ lists, but these should absolutely not be treated as a guarantee for success. Beyond ‘best buy’ lists fund factsheets and fund manager reputation can often be helpful sources to inform decisions.
You need to balance your objectives and risk-levels with what you are reading in the marketplace in order to make a balanced, confident decision.
Tracker funds are often a staple choice for newcomers to investors because of their nature, e.g. if the FTSE rises, the value of your investment rises.
Buying and Selling Funds
An online platform or ‘fund supermarket’ is the most cost-effective way to buy funds and provide you with a large range to chose from.
When selecting a fund supermarket, you should pay close attention to the charges as these reduce your returns and significantly in cases. The associated charges are being taken by the supermarket to pay themselves as well as the fund manager. The key ones to consider are:
- Platform Fee – The charge from the fund supermarket on your investments, sometimes a flat fee and sometimes a % on the value of your fund.
- Annual Management Charge – The charge from the active fund managers themselves, expressed as a % and taken in relation to the value of the fund.
- Buying and Selling Charges – Typically a fixed fee, ranging from a few £’s, up to £30.
- Transfer Out Fees – You may wish to transfer your funds to another fund supermarket, this can range from no cost up to £30 per fund.
When selling funds you will also get the price on the next day as they use forward pricing. This is different to the shares where the live price you see, is the price you receive. As the fund consists of many holdings, the risk of a substantial fall in value the next day is limited.