Why funds are better than shares

Published by Rachel Lacey on 12 February 2014.
Last updated on 12 February 2014

Coins and share chart

But this approach is high risk and expensive. Not only would you have to do an enormous amount of research to pick the most appropriate investments for you, but it would be all too easy to place all your eggs in one basket. You'd also need to invest a huge sum to build a sufficiently balanced portfolio.

All of the individual dealing charges would also make your portfolio incredibly expensive. With property, the costs of purchasing and managing your holding could be particularly prohibitive.

The easy and affordable way to invest in all of these asset classes is via a collective fund. The most popular type is a unit trust or open-ended investment company (OEIC). Here your money is pooled with that of other investors and investments are bought and sold on your behalf by a fund manager in line with the objectives and risk profile of the fund in question.

With such a large amount of money to invest, the manager will be able to buy a lot more holdings that you would be able to (there could be up to 100 companies held in a fund) providing instant diversification and reducing your risk. Costs are shared with your fellow investors.

You can sell your units whenever you like, but from a risk point of view you should be invested for the long term. You pay for this service via the fund's annual management charge. Prior to the abolition of commission payments to the companies, these averaged around 1.5% of the value of your investment, but now they are closer to 0.75%.

Equity funds will buy stocks and shares in companies (they might specialise by region, company size or industry) while bond funds will invest in corporate bonds from a variety of firms and/or gilts (government bonds). Commercial property funds will either buy property direct – typically offices, industrial estates and retail space – with your returns being driven by the rents the manager achieves on those holdings; or will be invested in property-related companies, with your returns linked to the growth in those firms.

Some funds invest across the asset classes and are known as mixed investment funds.

More About

Leave a comment