Get Organised: tidying up your finances
Last year was all about ‘sparking joy’ with Marie Kondo. This year is all about ‘organising with...
Its day 175 of lockdown. Just kidding, it’s only been 29 days, but it feels like longer. Between the longer hours of sun streaming through to my desk, and the sheer number of headline events that have happened in the last month, it could be July for all I know. Time seems be moving both very fast but also very slow, is it Monday? Tuesday? Saturday? Who knows anymore? One thing I am certain about is it’s week two of our Introduction to Investing “course” and I’m ready to tackle four very important topics that I think any investor, millennial or not, should know the difference between. So here we go: Week Two.
“April distance brings May existence.” — Anonymous
Simply put passive funds track an index, such as the FTSE 100, and are sometimes called ‘trackers’. They invest in the same companies as the index, and in the same proportions. So if BP represents 5% of the FTSE 100, a passive fund tracking the index would have 5% in BP as well. They’re copying the index – and will therefore will never beat that index. So, what’s the appeal? The main attraction is that most are cheaper than an active fund.
Active funds on the flip side are run by fund managers aiming to beat their index. Fund managers research a range of companies and invest in only those they feel are the best. They can also avoid those companies they don’t like. Because of this extra layer of work, active funds tend to be more expensive. If you’re curious to find out more, visit our guide to active vs. passive investing.
At FundCalibre we focus on active funds because, while charges are important, cheapest isn’t always best: performance after charges is what really matters.
No one wants to over-pay for a fund, but it’s right to expect to pay a certain amount for fund management services. Just as we’d pay a plumber or electrician to help us, so we should pay a fund manager. While it might seem expensive, you’re not just paying them to ‘fix a leaky pipe’, but also for the time it took them to learn their trade and do the job properly.
Fund costs can be a bit confusing though, so here’s a quick refresher course to help you compare:
Annual Management Charge (AMC): the annual fee the fund provider charges to manage the fund. It is shown as a percentage e.g. 0.75%. So, if you have £1,000 invested in the fund you will pay £7.50.
Ongoing Charges Figure (OCF): is a figure published annually by an investment company. The OCF includes the annual management charge (see above) and other costs such as registration, regulatory, audit and legal fees. Importantly, it does not include transaction costs or performance fees.
We disclose both of these fees in our ‘key facts’ section so you don’t need to go digging around for them. You should also be cautious of transitional and platform fees, these differ from platform to platform, so do your research before choosing what’s best for you.
Investing requires a long-term approach. While movies often depict buying and selling shares in rapid succession, our investing is actually quite different. In fact, some of the fund managers we rate very highly will buy and hold a company for three to five years.
Of course, some assets are riskier than others, so you should start by determining your personal attitude to risk. Like I said, investing is long term and if you’ve earmarked the money for something in the next 3 or 5 years (like the deposit on a house), it may not be a good time to make high risk investments.
Every fund and trust rated by FundCalibre includes a risk score from 1 to 10 (10 being the highest risk) to help guide you. This doesn’t mean the manager is a gambler, it simply means the asset class in which the fund sits is riskier – like Magna Emerging Markets Dividend fund. Those looking for something lower risk* might consider BlackRock Corporate Bond or TwentyFour Absolute Return Credit.
Often investors are given the choice between an accumulation share class or an income share class (known as ‘Acc’ and ‘Inc’ respectfully). When I first started in finance it was something I couldn’t understand: of course I want income, what kind of question is that? But what do I want to do with that income right now?
If you buy the accumulation share class, any income produced by your investment will be automatically reinvested back into the fund. This means your holdings will grow more quickly and thus there is more potential for profit.
In contrast, if you choose an income share class, you will receive that income. You can either opt to receive the income produced in the form of a regular payment (depending on the individual fund, this may be monthly, quarterly or annually), or choose to reinvest your income (more shares will be bought for you using the income you would otherwise have received).
Which share class you choose really depends on why you’re investing and if you need the regular income (think those in retirement). For most millennials, the accumulation share class may be a better option because the reinvested income provides greater potential for growth.
Still not sure whether you’re ready to invest? If your hesitance is stemming from fear of investing, try checking out our three steps to confronting your investment fears. If you still don’t feel confident enough in your ‘research’ ability then stick around for next week, when we look at ‘how to determine your investment style.’
*Elite Rated funds with a FundCalibre risk rating of 3.5 or less