Assets are one thing, but where do you start if you want to buy shares, say? What about bonds, or property? Well property is easy enough – click on Zoopla or go to your local high street estate agents and get on some mailing lists. But with less tangible assets like shares and bonds, then the easiest way by far is using an online dealing service.
Before that, though – consider the following: Firstly, you need to have some idea as to which shares to buy. That’s not easy unless you know what you’re doing. And there are literally millions of different options for you – where do you start?
And finally, if granny was right and you shouldn’t have all your eggs in one basket, then shouldn’t you hold a bunch of different shares? Won’t that get complicated? Wouldn’t it be easier if you could buy something which spreads your money widely, and where you haven’t got to keep an eye on tons of different shares every day to make sure they’re doing the job?
Enter the collective investment fund; from now on I’ll just call them funds. A fund is simply a collection of assets which many thousands of individual investors all own a share of. By pooling your money with that of all those other investors, you end up with a significantly larger sum invested, and as with most things in life, more money brings you buying power.
By investing in a fund, you will own more assets, spreading your risk much further. Let’s say you own ten shares yourself, directly, but through a fund you could hold hundreds or even thousands of shares. If any one of those shares fails, it’s going to impact you a lot less through a fund than it would if you owned ten shares altogether.
By investing in a fund, you can buy more assets, you can spread your risk further and you can often do so much more cheaply than if you were to buy all those different shares yourself. Some funds hold tens of thousands of underlying stocks – you could never manage that yourself. It would be too complicated and too expensive.
There are share funds, bond funds, commodities funds and even funds which hold a blend of these assets, which are called multi-asset funds. Most ordinary investors invest using funds as it just makes life so much easier. Funds do come in different flavours though.
Types of Funds
OEICS or Open-Ended Investment Companies – these are the most common type of fund, and simplest. The open-ended part of name refers to the ability of the fund to create and destroy shares in itself to cope with customer demand.
So, if more people want to invest, then they just create more shares in the fund. If people want to sell out, they can destroy shares. The price of shares in the fund is determined once per day and is the sum of the value of all the assets in the fund divided by the number of shares in existence.
Unit Trusts – similar to OEICs, but often have an initial charge called a bid-offer spread. These have fallen out of favour compared with OEICs, and are usually best avoided if you come across them, only because the OEIC charging structure is usually more transparent.
Investment Trusts – these are different altogether. They’re still a vehicle for pooling your money with other investors, but they behave more like a normal company – their shares are traded on the stock market and so sentiment is a factor in the share price, not just the value of the underlying assets they hold. They can borrow money, called leveraging, which arguably increases the risk, but can also boost returns. They are often lower cost than OEICs.
Exchange Traded Funds or ETFs – these are funds but are very liquid. They trade throughout the day, so the price of shares in the fund changes all the time. Usually they track an index – more of which in a minute.
ETFs are very popular, particularly with followers of the FIRE movement, because they are usually super low-cost and very easily traded. There are other types of fund, but these are the main ones for UK investors.
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