Investing for Beginners 101 — Let’s Talk Funds

As a new investor, here are reasons why you could be better suited to funds

Photo by Micheile Henderson on Unsplash

What are funds?

Funds offer an easy way to invest and conveniently diversifies your investment across a number of different assets. Funds can invest in various types of assets, such as shares, bonds or property (REITs), depending on the investment objective of the fund.

There are two main types of funds

Active funds: Active funds are managed frequently by the fund manager, who actively chooses the underlying investments held in the fund on the investors’ behalf, aiming to outperform the market and their peers. The fund manager will continually undertake research and analysis, and then update the investments in the fund when they feel it necessary. This means that over time, they will buy and sell different assets depending on market conditions. An active fund manager analyses stocks and tries to pick the best performers. Example is ARK Invest.

Index/passive funds: Index funds are more common as they aim to match the performance of a particular stock market index, often by investing in a plethora of companies in the index being tracked. Good examples of index funds are the FTSE 100 (a list of the 100 biggest companies in the UK. In this case, the index being tracked is the largest companies in the UK). A popular example of index funds is the S&P 500 (a stock market index that measures the stock performance of 500 large companies listed in the United States). There are 2 types of index funds: mutual index funds & exchange traded funds (ETFs).

There are many benefits of sticking to funds…

1. It is easy to invest in funds and you don’t need to do as much research as you would into individual stocks.
2. A professional makes the investment decisions by creating the fund, taking away the pressure of choosing and managing your own investments.
3. You have different funds that track certain niches and markets allowing you to get exposure to certain sectors without choosing and managing the stocks in those sectors.
4. Low risk: Funds are a basket of individual companies and therefore if a few stocks decline in price — the overall performance of the fund doesn’t decline massively.
5. Funds are typically diversified across different stocks, industries, sizes and countries that give you a breadth of exciting and mature companies to invest in. For example; one share of the S&P 500 index fund gives you ownership in 500 companies.
6. There are funds that are a mixture of equities and bonds (e.g. Vanguard LifeStrategy Funds) allowing you to invest in fast growing companies & markets but diversified with bonds which hedge against economic downturns (e.g. Brexit, Covid-19 etc.)
7. Typically less expensive to invest in as index funds tend to have low expense ratios, making them cheap to invest in.

…but it’s not without its few drawbacks

1. Compared to individual stock picking, funds historically offer lower returns. The S&P 500 ETF has an historic annualised average return of 10% since its inception.
2. You would not benefit massively from stocks/assets that are doing extremely well in a fund, as funds are really diversified — and therefore, dilutes returns.
3. Fund managers typically sell their own funds on their platforms (e.g. Invesco funds, Vanguard funds). However, you could use brokerage platforms that provide a broad range of ETFs.
4. As funds are created by fund managers, you have no control over which stocks are added to the funds and you might end up investing in assets that you don’t agree with or goes against your ethics.

If you do not or cannot conduct the level of research and due dilligence needed for individual stocks and/or your appetite for volatility is low — you might be best sticking to funds.

Disclaimer: This is not invesment advice and if you would like investment advice, please seek a qualified financial adviser.