I personally choose to invest in funds. They make it easier to invest in lots of companies and therefore reduce my risk. There’s a few things to know about funds, which will help you decided what to invest in.
Income or Accumulation funds
Most funds have an income version and an accumulation version. An income fund is one that pays dividends into your online account, so you can withdraw them and spend them or invest them elsewhere. An accumulation fund is one that pays the dividend straight back into the fund automatically.
As I am investing for my future and want my funds to grow as much as possible, I choose accumulation funds.
Passive or active
An actively managed fund is one that is managed by a person, who sells and buys shares within the fund based on what they believe will be good decisions. The fee for an acitively managed fund is higher than a passively managed fund, as the human element costs more.
A passive fund is the opposite; it’s a fund that tracks a market with no human intervention. The fees can be as low as 0.1%.
In theory, you might get a higher return from an actively managed fund because a human is able to forecast a potential positive or negative event and trade accordingly. However, nothing is guaranteed in the stock market, and as well as paying a higher fee, it’s possible that your investment could fare worse.
I predominantly choose passive funds. However, I do invest in a fund of ethical companies. This was one of my first choices of funds to invest in. I figured if I lost all my money, it would be in companies trying to make the right decisions.
It’s worth paying attention to the ongoing charges of funds, because as your balance grows they can really eat into your profits. Ongoing fund charges can be as low as 0.1% and I’ve seen some above 5%. The fund charging over 5% fell by 20% in 2015 but grew by 80% in 2016, which is pretty phenominal growth. But that doesn’t mean it will continue, and you could face a loss on top of your 5% charge.
The up and coming post about diversification will talk more about geographical region and sector. In essence, you can choose funds that focus on a specific market, such as the UK, US or pacific. In terms of specific sectors, this could be energy, financial services or healthcare.
If you choose a fund focussed on a specific region, there will be a variety of passive funds to choose from. However, if you choose a specific sector, these are normally actively managed.
You can achieve a spread of sectors my choosing multiple funds, as top companies in countries around the world will span a number of different sectors.
How to choose?
A difficult question to answer! I always use this fund selector tool from TD Direct investing when I’m doing my research. It’s a great way to get an idea of what funds there are, what the management fees are, short and long term performance, etc.