If you’re new to investing and don’t know what to choose, investment funds, like mutual funds, can be a simple and convenient way to invest in stock markets. Here’s what you might need to know...
They’re like hampers of investments
If you don’t have the time or confidence to choose between the millions of investments (things like stocks, bonds, property and commodities) available worldwide, mutual funds can do some of the hard work for you. Think of funds as hampers full of tasty investments that have been pre-selected by experts. Some funds contain just one type of investment, like shares or bonds, while others contain a mix of different assets, or represent a specific market or region, like the UK, Europe or Asia.
They can help spread risk
When you invest in mutual funds, you’re usually spreading your money across a range of investments or markets. This is known in the investing world as diversification and can help mitigate the risk that your overall investment doesn’t perform positively and you get back less than you put in. Check out our blog; 5 things you need to know about diversification to find out how it works.
They are more likely to be actively managed…
Most mutual funds are actively managed, meaning the fund’s manager picks specific investments for the fund in the hope they’ll outperform markets and provide you with positive returns. Having someone who spends time analysing market data and regularly adjusting the investments in your fund may offer peace of mind, however it can mean higher fees, too. The average fee charged by active fund managers is 0.9%1 per year, and this without taking into account admin and trading costs. Charges aren’t the only downside of actively-managed funds either. Research shows that over 90%2 of active stock fund managers underperformed the S&P 500 over the past 15 years.
1: The Telegraph, June 2017 - https://www.telegraph.co.uk/investing/funds/invest10000-pay14227-fees-fund-charges-erode-money-stealth/
2: Elliott Wave International, Apr 2017 - https://www.elliottwave.com/Stocks/Why-90-percent-plus-of-Active-Stock-Fund-Managers-Underperform-the-S-and-P-500
But they can also track markets
Some mutual funds are passively managed. Put simply, investments they hold aren’t selected by an active fund manager with the ambition to beat markets, but instead are chosen to mirror market movements. As a result, the performance of such mutual funds will match the performance of markets they’re following. Let’s imagine that you’re invested in a mutual fund tracking the FTSE 100. If this market goes up by 3%, then your portfolio will probably grow by 3%, and similarly, if the FTSE 100 drops, the value of your investments will fall too. Tracker funds tend to charge lower fees compared to actively-managed mutual funds. You can find out more information by reading our blog; 5 things you need to know about passive investing.
They’re widely available
You can have access to mutual funds through banks, traditional investment management firms, trust companies, and digital investing services, like Wealthify where ease of use and affordability are combined. Indeed, instead of spending hours searching for the right mutual funds, our investment team do the hard work for you, including picking your funds and managing your portfolio, for an annual management fee that never exceeds 0.7% and can be as low as 0.4% (depending on the total value of your Plan) and fund charges of, on average, 0.18%.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.