A beginner’s guide to
fund investment

Published: 16 August 2019

For some, investing in the stock market still evokes images of traders waving pieces of paper around or yelling frantically down the phone.

While advances in technology mean many stock exchanges no longer have trading floors, investing in companies by buying shares in them remains popular. It’s not the only way to participate in the ups and downs of the stock market though. Another popular way is through collective investments, otherwise known as funds.

So what’s the difference between the two approaches?

Investing directly in company shares

Buying shares in individual companies with the aim of profiting from an increase in their price is perhaps the most traditional form of investing.

For some investors who are willing and able to accept the risk that investments can go down as well as up and they may get back less than they put in, that’s where the thrill lies – it can become a hobby to try and identify potential winners, researching companies and markets and aiming to make well-timed trades.

It’s become more accessible too, with the rise of online investment platforms and the sheer volume of information available on individual markets and companies making it easier to invest directly in stocks and shares. But with high potential reward comes high potential risk. Taking a bet on one or even a handful of companies can leave an investor distinctly vulnerable to events out of their control.

That’s why buying shares in individual companies tends to be the preserve of more experienced or expert investors and/or those who like to dabble in direct investing alongside other types of investment. It can be less suitable for those who are risk averse and might lie awake at the prospect of sharp investment losses.

Investing through collective funds

Another way to benefit from stock market growth is to invest through collective funds such as unit trusts, ‘open-ended’ investment companies and investment trusts. These funds pool the money paid in by large numbers of people and invest it on their behalf through a professional fund manager (or team of managers).

The potential advantages of this approach are numerous - being able to benefit from the experience and expertise of the managers; the vast choice of funds available; reduced costs of investing due to economies of scale; and diversification, to name just a few.

That final upside – diversification - refers to the ability of funds to manage risk by spreading investors’ money across a wide range of companies, sectors and assets. So if one type of asset or company is falling in price, there could still be money in investments that are performing better.

Investing through funds is not without risk however. Fund investments can still go down as well as up and there is still a risk you get back less than you put in. For ‘open-ended’ funds there’s also the potential you won’t be able to get access to your money exactly when you want to. While rare, when this does happen – as has recently been the case with the Woodford Equity Income Fund – it can be very stressful and inconvenient for those affected.

Open-ended vs closed-ended funds

‘Open-ended’ funds buy and sell assets to keep step with the amount of money investors are paying in to and taking out of them. They work well for assets like listed shares and bonds that are usually quick and easy to buy and sell. Unit trusts and open-ended investment companies (OEICs) are examples of open-ended funds.

‘Closed-ended’ funds on the other hand, have a set number of shares to go around and these are bought and sold amongst investors like any other company share. The manager does not have to buy or sell underlying assets to keep step with the money investors are paying in and taking out. So they can be a good option for investing in assets that may take more time to buy and sell, like property and shares in companies that aren’t listed on any of the main stock exchanges. Investment trusts are an example of closed-ended funds.

A world of choice

Looking beyond the legal structure of a fund, there are myriad different investing strategies a fund may follow. The options – not all of which are mutually exclusive - include:

  • Active funds - where a fund manager researches and makes active investment decisions in a bid to meet the fund’s particular objectives over time. With this type of fund you tend to pay more in charges for the benefit of the manager’s expertise.
  • Passive funds - these aim to simply track or replicate the performance of particular stock market indices (for example the FTSE 100 or FTSE All-Share). You tend to pay less for these than active funds, but you won’t have a manager seeking to make the most of opportunities or manage the potential for losses in your fund.
  • Asset class funds - some funds will specialise in particular types of assets, such as investing entirely or primarily in bonds, shares (equities) or property for example.
  • Income/growth funds - income funds focus on investments that will help them pay out a regular income to investors, whereas growth funds focus mainly on growing their investors’ money. It’s worth noting that many funds offer both income and growth - reinvested dividends, for example, can be a big driver of long-term growth.
  • Sector funds - some funds specialise in certain industries (such as financials, construction, oil and gas), regions (such as Europe, emerging markets) and countries.
  • Multi-asset funds - these aim to provide one-stop shop diversification by investing across different assets and sectors.
  • Ethical funds - this refers to an increasingly popular type of investing in which funds invest according to certain ethical, environmental and/or socially responsible criteria.

Getting started

If you’re new to the idea of fund investing, you can see there is a huge amount of choice. It will take a bit of research to identify the most suitable funds for you and understand what the different approaches actually do.

Investment platforms such as Alliance Trust Savings and interactive investor are a good place to start, giving you access to resources that will help you understand what different funds do, how they perform, what they invest in, how much risk they take and how much they cost, among other features.

In particular, look for the Key Investor Information Document or Key Information Document for any fund you might be interested in. It’s there to give you essential information about the fund and is something you should always read before deciding to invest.

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest. Past performance is not a guide to future performance.


BETTER CHOICE

Alliance Trust Savings is now part of the interactive investor group. If you’re a self-directed customer of Alliance Trust Savings your Account(s) will move to the interactive investor platform later this year.

There you’ll also be able to access thousands of potential fund investments. And, if you’re a beginner looking for a place to start, you’ll find select fund ranges chosen by experts too.

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Alliance Trust Savings Limited is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings Limited gives no financial or investment advice. ‘Alliance Trust Savings’, ‘ATS’ and 'AT Savings' are all brand names of Alliance Trust Savings Limited together with the ‘Alliance Trust Savings’ logo are owned by and used with the permission of Alliance Trust PLC, the previous owner of Alliance Trust Savings Limited. Alliance Trust Savings gives no financial or investment advice.