What is an investment fund?

Sam Slator 26/01/17 in Basics

An investment fund pools together investors’ money in one big pot. It is a way of investing money alongside other people, so that you can get access to a larger number of companies or assets, spreading risk and allowing a professional manager to make the tough investment decisions.

The advantage of investing in an investment fund rather than just directly in shares is that most investors don’t have vast amounts of money, so if you buy individual shares, you won’t be able to buy many. If you invest in a fund, because your money is pooled with that of other investors, your money will be spread over a larger number of shares, which reduces the risk of your investment. By investing in a fund, you won’t have to decide in which stocks to invest.

Investment funds can invest in various different asset classes e.g. property, equities, fixed interest etc. Equity funds are the most common and they can invest in various different regions e.g. UK, Europe, Asia etc.

Read more: Investment trusts – five things to know

Active and passive investment funds

Some funds are known as ‘passive’ and these will simply mirror a specific stock market or ‘index’, investing in exactly the same companies.

Other funds are ‘active’. Actively-managed funds have a manager at their helm who devotes their time to analysing stocks and selecting those they believe will outperform. They will whittle down the universe of several thousand stocks to invest in perhaps 100. How they go about doing so varies widely from one manager to the next.

An investment fund can be purchased either outside or inside a tax-efficient wrapper, such as an individual savings account (ISA) or a pension.

 

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.