Thursday, August 15, 2013
We look at the reasons people invest in various types of investment funds as an alternative to building a portfolio of shares.
The age of the investor
Investing has come a long way over the past few decades. While it might once have been seen as a specialist pursuit, these days an investor could be anyone from a high-flying big city institutional investor to the guy next door ensuring that his money works for him in the years approaching his retirement.
The access we now have to investing is much wider and more easy to use than previously, too. In the old days if you wanted to buy and sell shares (or other asset classes) it involved picking up the phone and also of course having the services of a stockbroking company at your disposal. Nowadays it’s all done online – or can be, if you so choose.
It’s important to state – before I go any further, though, that if you’re looking for financial advice, then it’s important to get in contact with a professionally operating, qualified independent adviser. For more on this, sites like unbiased.co.uk can offer a wealth of information. Blog posts are for information purposes only, and that’s how it should be.
The reason there’s so much investing going on right now by small investors and DIY investors isn’t simply the accessibility factor. A combination of the rate of inflation along with low interest being offered on fixed-rate savings means that in order to get a potential return on money that beats inflation, investing can be an attractive option for those that can afford it and are prepared for the risks. Investments can go up or down in values have the potential to bring a return that exceeds what a fixed-rate savings account is likely to offer.
One of the benefits of investing in funds is that – especially for small investors – it can save time. Rather than put on your specs and scrutinise all the facts and figures for the companies you invest in, with a managed fund there’s a professional fund manager doing all of that for you.
Funds invest in a range of different things too, meaning that the investment is diversified. Diversification is one of the means that investors use to help minimise risk. Since one stock behaves differently from another within the market, it means that, generally speaking, a range of investments is safer. For instance if all your money was in, say, a wheat production company, then adverse conditions could wipe out value to a great extent. However if only a percentage of your money was with the wheat company, only a percentage would be affected by that particular set of conditions. The idea is that if some investments within a diversified portfolio don’t do so well, the effects of this may be lessened by the better performance of others.
Active and passive funds
While some funds (the active ones) have a fund manager looking after the investmnets within them, there are also tracker funds that are set up to ‘track’ the performance of an index. This is done by buying shares in all of the companies in the index (relative to their value within it) or a selection of shares within the index. This type of fund is generally seen as lower risk since they’re designed not to outperform the index but to follow it. Of course due to charges or ‘tracking error’ it can sometimes mean that the tracker doesn’t follow the index exactly. But on the whole, passive funds are seen as relatively inexpensive and offer an easy-to-understand type of investment.
P Kinard is an investments blogger - catch up with him on Twitter for more investments conversation.