Investing — Beginners guide to “Funds”

Want to know where to start investing? how to invest? then read on…

In a previous article, I gave you details on what an investment is and the do’s and don’ts of investing. However, I did not mention specific vehicles you can use to invest and the types of funds available to you — this will increase your investment knowledge helping you in your investment journey.

“I made my first investment at age eleven. I was wasting my life until then.”
— Warren Buffet

What is a fund?

A fund is a pool of investors' money managed by a fund manager who will then allocate the money across one or more different asset classes. Each fund will have rules as to what percentage is allocated by the fund manager to what asset and how much cash will be kept within the fund. An investor will then receive units, each unit representing the total market value of the fund divided by the number of units held in the fund.

There are multiple types of funds available totalling globally in 2021 over 130,000, this number fluctuates but is growing. In the UK as of 2023, there are approximately 4,500. In the US currently, there are over 7,400. But do not let this put you off.

What types of funds are available?

The types of funds available that you should concentrate on are the following:

• Equity funds — these invest in equities (shares in listed companies). The fund could either be focused on global companies or specific industries or countries. The value of your invested money increases as the invested company's share price and dividends increase. Equity funds can be the most profitable to the investor, however, fluctuations are much higher than in any other fund type.
• Bond funds — these invest in *”interest-bearing securities” using your invested money to be loaned to a corporation or government over a specific period. Usually, the most stable investment but also will depend on what bond you invest in. If the corporation or government defaults on their payments then you may not get back your initial investment.
• Balanced funds — these contain a mix of both equities and bonds with the possible inclusion of *“money market instruments” (not something you need to know at the moment). The fund may concentrate more on equities than bonds or vice versa. They are flexible and can react to market conditions.
• Open-ended real estate funds — these invest in either commercial or residential properties. The value of the fund depends on how high both the rental income and the value of the buildings become.
• Exchange Traded Funds (ETFs)/ Index funds — this is a special case as no fund manager selects the investments, instead, the fund automatically tracks an index such as the *FTSE100, *DAX, *CAC, *SAP500 etc.. (see bottom of article for explanations) the value of the fund will depend exactly on the performance of the underlying index.

Investing in funds

Although it is possible to invest directly in an asset class, you must research to ensure it is a solid investment. This is where funds come in. Although some research will be needed on the fund(s) concerned it will be by no means as much as a fund manager. I would stress if you do not feel confident to do your research and to learn about investing while investing, do talk to a Financial Advisor (FA) as he/she can get you started.

When investing in a fund you have to consider the underlying investments currently invested in the fund as you could be investing in the same company in both funds and accidentally increase your investment in said company. This would increase your risk level beyond what you can accept or, if it is a good Bond decrease your risk level.

Breaking down the fund factsheet — Each fund has a fund factsheet, which gives details on such things as performance, charges, asset allocation, geographic split, and the rules it will be governed by. For example, the “Liontrust UK Growth” fund for the asset allocation is high on “Equities” with a small amount of cash (see below).

However, the “Invesco Balanced Risk 10 UK Y” balanced fund has an asset allocation that looks very different (see below)

and has a geographical split far more balanced (see below)

It is worth noting that your risk level/appetite will need to be taken into account, although in my previous article (what an investment is and the do’s and don’ts of investing) I suggested that in your 20s you can take the highest risk as you can catch up on any losses than if you are in your 60's, you may wish not to build a portfolio that is higher risk and want to take a much more balanced or even courteous view on risk in your 20s. Your risk level is a perception of what you feel you are comfortable with at the time in your life; my attention to high risk in your 20s and low risk in your 60s is a starting point, not a solid rule.

Available financial vehicles

To invest you need 1) a type of financial vehicle to assist you, 2) a company that supplies the platform for you to invest.

The financial vehicles available to you are as follows:

ISA — (Individual Savings Account) A UK-based financial product where your invested money is shielded from income tax, capital gains tax and tax on dividends. As of the 2023/2024 tax year, you can invest up to £20,000. They can contain either mixed investments (shares, funds, cash) or just cash. Banks normally offer cash-only ISAs and these will have a fixed interest rate. Any money invested in an ISA will be taxed before and not taxed on taking the money out.

JISA — (Junior Individual Savings Account) same as an ISA of £20,000 invested per year in the 2023/2024 tax year.

SIPP — (Self Invested Personal Pension) As of the 2023 tax year you can invest per taxable year (starting April 1st) is £60,000 and a lifetime pension contribution of £1,073,100. Any money invested will be paid in before tax and taxed when taken out. On taking your pension you will be taxed at the taxable rate depending on your current earnings per year.

For illustration; If you are in the higher tax bracket of 40% and you pay into your pension £100 p/month then the government will pay £40 totalling £140. On taking this money out if you are in the lower tax bracket (most people will be on retirement) then you pay 25% of the money you take out coming to £105. Remember that this is without any interest over the pension term.

Investment account — if you have paid in the max for a tax year in both your pension and ISA a brokerage may offer an investment account for investing any further cash, but the investments will be taxed as they are not shielded from the tax man like they are for ISAs, JISAs and SIPPs.

I gave details on a SIPP and not any other type of pension scheme due to this article concentrating on brokerage accounts such as Hargreaves and Landsdown or Tilney Bestinvest. Other pension schemes do offer means of investing but be wary that companies such as BlackRock or Vanguard will only offer their funds and will not supply the broad range of investments (Equities and Funds) that a brokerage (such as mentioned) will offer.

In my next article, I will delve into asset allocation and give you a better idea of how to diversify your money between asset classes.

Reference:

*FTSE100 — this is heavily weighted to the banking sector due to it tracking the largest 100 UK companies.

*DAX — this index contains the 40 largest German companies trading on the Frankfurt Stock Exchange.

*CAC — the index tracks the 40 largest companies on the Euronext Paris stock exchange.

*SAP500 — an index of the US tracking the top 500 companies.

*Interest-Bearing Securities — Interest-bearing instruments are securities that pay interest at a specified rate either at periodic intervals or at maturity.

*Money Market Instruments — Financial instruments that are monetary contracts between parties.

Important Disclaimer: I am not a financial advisor, nor am I an investment advisor. All information contained within this article is from my personal experiences over the years with investing. Remember, unless you invest cash with a financial institution such as a bank on a fixed interest rate then you could get back less or even none of the invested money.

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