Investment Fund need-to-knows – Money Saving Expert

A fund is essentially a collective investment, where you pool your money with other people rather than choosing and buying individual shares. Funds usually contain a range of shares or other assets, often based around a specific theme, for example, European markets, green companies and corporate bonds.

The exact choice of investments is decided by the fund manager and will either be actively managed (where decisions when to buy and sell are frequently made, with the aim to deliver a return that’s better than the stock market) or passive funds (which track a market, with the aim for steady performance rather than maxing returns).

You then buy ‘units’ in your chosen fund, which rise and fall in line with how well the overall fund performs. Multiply the price of each unit in your fund with the number of units, and you’ll have the value of your investment, before any fees.

Funds are generally less risky than buying shares

As funds often include a variety of shares or assets, and the fund manager is working on behalf of a group of investors for a fee, it’s usually considered a less risky route into investing compared to buying individual shares, where you shoulder the risk alone.

However there are still no guarantees, and some funds can be high-risk – the theme or combination denotes the risk factor. For example, if the fund focuses on “fledgling biotech companies in emerging markets”, all the elements involve a high degree of uncertainty. So if it goes well, you could be in for massive gains, but if it goes badly, massive losses.

• Investing is generally a long-term option – you should invest for at least five years. As a rule of thumb, five years allows enough time to ride out any bumps in the market that might see you make a loss on your money. If you know you’re going to need access to your money in this time, then perhaps investing isn’t the right choice.

• You’ll need to factor in fees, as these can eat into your investment. It’s not just the performance of the investments within the fund that dictates your rate of return, you’ll need to account for fees too. There are a number of costs associated with funds, from platform charges from the provider you choose, buying and selling charges, plus additional management fees associated with the funds you pick (more on this below), all of which will need to be subtracted from any profit (or losses) you make.

• The market is unpredictable – invest on a regular basis to smooth out ups and downs. It’s tempting to try to time the market, but it’s almost impossible and even the most experienced investors get it wrong. By pulling out of the market as soon as a fund dips or trying to second-guess when a fund will reach its peak, you could lose out on sharp recoveries or see the price go up after you’ve sold.

  Instead, you should invest on a regular basis – this is called ‘drip-feeding’ in investment lingo. This will give you an added benefit of something called ‘pound cost averaging’. For example, invest £10,000 to buy units in a fund valued at £10 each and you have 1,000 units. Yet if you invest the same amount over two months, you’d get 500 units in the first month, but if the fund’s unit price went down to £9.50 in the second month, you’d get 526 units.

• Watch out for scams – never buy funds from a cold caller. If you’re contacted out of the blue by someone inviting you to invest in a fund, say ‘no’. It is almost certainly a scam. Here fraudsters will cold-call investors offering them worthless, overpriced or even non-existent funds.

  While they promise high returns, those who invest usually end up losing their money. And remember, if it sounds too good to be true, it probably is.

Once you have an account, you simply search for the fund you want to buy and choose a quantity or value – whichever you choose, you need to have enough money in your account to cover both this and any charges to buy.

Accept the quote it generates and the fund will then show in your account with your chosen platform (your account and the funds in it are often known as your portfolio).

However, it may take a couple of days for the platform to fully process your buy order, so you may get a slightly different price depending on whether the fund’s price has moved between you submitting the order and the platform completing the process. But differences should be small unless the market is very volatile with prices moving up and down significantly in short spaces of time.

Many of the large platforms will also give you the option of choosing ready-made portfolios, often based on the level of risk you’re willing to take. All the decision making is done for you, but usually comes at a cost (as there are multiple fund management fees) – though if you’re not sure what you’re doing, this may be better than the money you could lose by making a poor investment decision yourself.

If this route sounds appealing, robo-funds might be a good option to consider (if you want to go down this route, we’ve robo-fund platforms to try in our Stocks & Shares ISA guide. All providers also do non-ISA investment accounts if that’s what you prefer).

Selling funds through an online platform is just as simple as buying them. You’ll be able to see all the funds you hold in your account, and next to each fund there’s usually a sell option. Pressing this will instruct the platform you no longer want to invest in that fund.

Funds are sold the next day

Unlike shares, where you’ll get a live price there and then when you instruct to sell, funds are sold on a forward pricing basis. As the price is affected by the underlying shares that sit in the fund, the price will be calculated for the next working day. Fund pricing doesn’t move around as much as individual shares, however if the markets are falling you most certainly will lose out, but it shouldn’t be by a lot.

You’ll be alerted when the fund has been sold and you can either choose to keep the money in your account as cash (though beware as you usually don’t get interest), or reinvest in a different fund.

You may not need to sell if you’re switching platforms