What is a fund and how does it work?
A fund is just money that’s set aside for a specific purpose.
In investing, a fund lets you pool your money with other investors. Then that money is invested in assets like shares, bonds, property or other assets. The pro of this is that you can benefit from buying a lot of investments in one go instead of buying them one by one.
When you do this, you’ll own a number of shares based on the amount you invested. If the value of the investments in the fund goes up, so does your share of the fund (yay!). But if the value of the investments in the fund goes down, then the value of your shares will go down too.
Who’s managing my money?
Funds are generally managed actively or passively.
Actively managed funds have fund managers who are in charge of managing and investing your money for you. Their main goal is to outperform the stock market and get you better returns on your investments. But this isn’t guaranteed. Actively managed funds usually have higher fees because someone is managing your money for you.
Passively managed funds are also known as index funds or tracker funds. All they do is track a specific segment of a financial market, which is called an index. For example, a FTSE 100 Index tracks the top 100 biggest companies listed on the London Stock Exchange. Awesome, right?
If picking stocks for your portfolio seems overwhelming, funds can be a great option to get started with. You get to spread your money across several different assets, companies and industries. This means that you also reduce your risk. Passively managed funds have lower costs as well, which makes them super popular with new investors.