Funds and Exchange Traded Funds (ETFs)
A fund is a collective investment. It pools together money from many different investors and uses it to buy investments, e.g. company shares, bonds or property, or a combination of these.
Funds aim to make money for investors. They try to do this through buying assets which the fund manager expects to rise in value to make capital gains, or by collecting regular income from dividends, rent or interest payments.
Like all investments, the value of funds and ETFs and any income they produce can go down as well as up, so you could get back less than you invested. Remember too that investing is not for everyone, and if you’re not sure whether an investment is right for you, you should obtain financial advice.
Each fund has its own objective, e.g.
- Deliver growth by investing in UK or overseas companies
- Generate income by investing in UK Government bonds or a portfolio of commercial property
- Deliver growth and income by investing in companies that pay high dividends
A professional fund manager decides which investments the fund holds and runs the fund to meet its investment objectives.
Watch this short video to find out more.
An overview of funds
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An overview of funds
An investment fund is similar to a communal garden.
Instead of being home to few favourite plants you might buy yourself, a communal garden offers much more diversity.
In a similar way, funds pool your money with that of other investors to buy company shares, bonds or other assets across a much wider range than most individuals can alone.
Including those assets that are more difficult to get hold of privately.
Just like a good professional gardener tends a garden a fund manager looks after a fund - both are experts that do the hard work.
They’ll closely monitor performance and make decisions on your behalf, using their expertise.
These factors make funds suitable for new investors and those who don’t have the skill and time to manage their investments and also experienced investors who want diversified access to other asset classes and overseas markets.
Some investments in the fund will grow faster than others. Some will rise. Some will fall.
But the risk is spread because of the fund’s diversity. And of course, the effect of an investment that grows well is also offset by those that don’t.
Funds aim to make money for investors through buying and selling investments to make capital gains and by collecting regular income from dividends and interest.
Investors can choose whether to re-invest and aim for more growth or harvest the results by receiving an income. So whether you are a fund manager or a gardener, you need green fingers.
Therefore funds are a straightforward way to diversify your portfolio. They are diversified, which helps spread risk however the value of funds can rise and fall.
But funds have a dilution effect - one big success, or failure, makes relatively little difference to the overall returns.
They are a long term investment that you should expect to hold for at least 5 years.
And finally, funds are managed by an expert who does the hard work for you.
Remember though, the value of investments can rise and fall and you may lose money.
Why might you invest in funds?
- Diversify your portfolio and reduce potential risk
Funds usually hold a range of investments, and in this way aim to spread your risk. They might invest across a range of asset classes, markets or geographical locations. Even funds that invest in just one market or location offer diversification, by investing in a range of companies. Remember though that even diversified portfolios carry risk and you could get back less than you invested.
- Managed by experts
Fund managers use their expert knowledge, experience and research to make investment decisions on your behalf. Fund management does come with a cost and you should factor this in when choosing investments.
- No fixed maturity date
Generally funds continue indefinitely. As with any investment though, you should look to hold them for at least five years. However even then there is no guarantee of a return and you could get back less than you invested at any time.
- Easy to manage
Funds take away a lot of the hard work involved in making investment decisions. Because the individual underlying investments are managed for you, they can be an easier option if you’re just starting out or looking to invest in markets that you’re not familiar with or which are difficult to access, e.g. emerging markets. Remember though that you do pay for fund management, and you should take this into account when choosing investments. Be aware too that specialist areas such as emerging markets carry additional risks of their own, and these could increase your chances of losing money.
- We’ll help you save on fund charges
New ‘clean share classes’ of funds have been introduced, typically with lower costs. So you benefit as soon as possible, we’ll convert your existing funds where a cheaper version is available.
The most common types of funds are unit trusts or Open-Ended Investment Companies (OEICs). There are two other main types of funds you should know about: investment trusts and Exchange Traded Funds (ETFs).
Investors in shares, ETFs and other listed investments will now pay £1 less for every deal. And you won’t have to place as many deals to move to a lower commission tier.
Unit trusts and OEICs
These are known as open-ended investments. This means they can issue and cancel their units or shares at any time. When you invest in a unit trust or OEIC, your money goes directly to the fund for the manager to invest. When you decide to leave the investment, you sell your units or shares back to the fund. These types of funds are valued once per day, and each day this is the price at which investors must buy or sell their fund.
ETFs are like tracker funds, investing in or replicating a specific index. However, their shares are listed on the London Stock Exchange, providing real time prices and the ability to buy and sell at any time like ordinary shares.
Investment trusts are closed-ended funds, because the number of shares issued is fixed. When you invest in an investment trust, you buy shares in the fund. These are listed on the stock exchange – in the same way as individual equities. Their value is influenced by demand for the shares as well as the value of the assets the fund owns.
A principal difference between a conventional fund and an investment trust is that the investment trust can borrow to make additional investments. This means that the price of investment trusts isn’t just determined by any shift in the value of the underlying assets. For example, let’s say an investment trust has borrowed and invested the proceeds. If the investment doubles in value and the trust sells it, it can repay the loan (ignoring interest) and 'pocket' the profit. On the other hand, if that investment becomes worthless, the loan still has to be repaid. Because of this, the value of investment trusts can rise more quickly when the assets go up, but equally can fall more quickly when the assets fall. In other words, both gains and losses are magnified. Any debt the investment trust owes will need to be repaid before investors receive returns.
Actively managed funds
This type of fund has its investments chosen by a fund manager. Each fund has its own objective – the fund manager selects the investments that best match this objective.
The fund’s rules set out the types of investments it can hold and are explained in the Fund Factsheet and Key Investor Information Document (KIID). As long as they work within the rules, fund managers can use their own judgement to select the investments they feel will perform best.
Most funds compare their performance to an index. For example, a UK share fund might compare its performance against the FTSE 100 or FTSE 250, depending on the investments it holds. In an actively managed fund, the fund manager attempts to ‘beat the market’ by aiming to select investments that do better than average over the long term. This gives investors the chance to earn better returns – but remember there are no guarantees. However, this active style of management comes at a price – investors usually pay higher annual charges for these funds than for tracker or passive funds.
Passive tracker funds
Although a passive fund still has a manager, the investments are selected automatically in line with the fund’s objectives. Most passive funds track an index like the FTSE 100 or S&P 500, so they are often referred to as tracker funds. However, the aim isn’t to beat the index but simply to match it, so if the market falls or rises by 30%, the fund should too. ETFs are often a lower cost way to track a sector or market then a conventional tracker fund.
How to buy and hold funds
You can use our flexible general investment account called MarketMaster®. To benefit from tax-efficient returns, you can buy and hold funds in a Barclays Stockbrokers Investment ISA or Self Invested Personal Pension (SIPP). If you’re an experienced investor, a SIPP may be for you. Remember tax rules can change and the benefit to you of the tax concessions around ISAs and pensions will depend on your individual circumstances.
Things to remember
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- The value of funds can go down as well as up and you could get back less than you invested
- Funds are medium to long-term investments, at least 5-10 years, and selling earlier increases the risk that you could lose money (although, as with any investment, money could be lost at any time)
- Investing is not for everyone. If you are unsure about funds, or any investment, please seek independent financial and taxation advice.
Asset classes - different types of investments with varying degrees of risk, e.g. cash, shares, gilts and bonds.
Capital gains - the profit made when any asset, including stocks, is sold. If a loss is made it is called a capital loss.
Collective investment - an investment structure which pools together investments from different individuals and combines them to fund investments. Each individual investor then holds a small amount of each asset.
Dividends - payment made out of a company's post-tax profits and distributed to its shareholders at the discretion of the company’s board of directors. This is usually expressed as pence (per share).
Ex Dividend - if you buy shares cum dividend (before the 'ex date') then the price of the shares will have reflected the fact that you have also bought the right to the dividend. The dividend will then be claimed from the seller of the shares to pay to you on or soon after the payment date. As your broker, we will be responsible for claiming the dividend on your behalf. ‘Ex dividend’ simply means without the dividend – so if you’re buying shares ex-dividend then the seller retains the dividend.
Exchange Traded Funds - funds that track an index such as the FTSE 100, or market performance through a single share.
Indices - statistical tools that measure the state of the stock market or the economy, based on the performance of stocks or other components, e.g. the Dow Jones Industrial
Interest - the money you can earn by depositing money in a savings account. You can also earn interest on some types of investments where you are lending money to a company or Government, e.g. gilts and bonds.
Investment trusts - a collective investment company listed on the London Stock Exchange which invests in the shares of other companies. These have a limited number of shares and the price varies with supply and demand.
Shares - companies raise capital from investors and then divide it into units called shares. Buying the shares brings rights – a stake in the business – and the risk of losing that investment.
Stock exchange - a market in which securities are bought and sold, e.g. stocks, shares, gilts and bonds.
Tracker fund - a type of fund which tracks the performance of a specific share index, e.g. the FTSE 100. Usually they will invest in all, or a representative proportion, of the companies within the index.