What are pooled investment funds?

Why invest through a fund?

There are several reasons to invest through a fund, rather than buying assets on your own:

• Spreading risk – even if you have a small amount to invest, you can have a lot of different types of assets you’re investing in – you’re ‘diversified’. If one of the fund’s investments does badly, it might not do so much damage, since the fund has lots of others to fall back on. Read our guide on Diversifying – the smart way to save and invest.
• Reduced dealing costs – by pooling your money, you might make savings because you’re sharing the costs.
• Less work for you – the fund management company handles the buying, selling and collecting of dividends and income for you. But of course there are charges for this.
• Professional fund management – fund managers make the decisions about when to buy and sell assets.

Active or passive fund management

Active management

Most pooled investment funds are actively managed.

The fund manager is paid to research the market, so they can buy the assets that they think might give a good profit.

Depending on the fund’s aims, the fund manager will try to give you either better-than-average growth for your investment (beat the market) or to get steadier returns than would be achieved simply by tracking the markets.

Managers sometimes do well and sometimes do badly – but few managers beat the market or even match it over the longer term.

Even if a fund did well in the past, there’s no guarantee that it will in the future.

Passive management – tracker funds

Over the longer term, very few actively managed funds beat the market or even match it – so you might prefer to track the market – if the index goes up so will your fund value, but it will also fall in line with the index.

A ‘market index tracker’ follows the performance of all the shares in a particular market.

In the UK the most commonly used market index is the FTSE 100, a group of the 100 biggest companies based upon share value.

If a fund buys shares in all 100 companies, in the same proportions as their market value, its value will rise or fall in line with the change in the value of the FTSE 100.

Funds that track an index are called tracker funds.

Tracker funds don’t need to be managed so actively. You still pay some fees, but not as much as with an actively managed fund.

Because of the fees, your real returns aren’t quite as good as the actual growth of the market – but they should be close.

Be careful! Some funds that are marketed as trackers don’t actually buy the shares in the companies in the index they track.

They are a mixture of other investments and derivatives designed to mimic the market.

These ‘synthetic trackers’ are more risky – be sure that you understand them before you invest.

Fund management fees

You can’t invest in funds for free.

There are lots of costs that need to be considered, such as annual management fees and dealing fees when investments within the fund are bought and sold.

While you might be happy to pay to have everything done for you, fees eat into your returns.

So it’s important to check the full fees of each fund, and choose the ones that give you the features you want at the best price.

• Dig deep and ask questions – the real costs might be more than the published charges.
• If you’re investing through a bank or building society stocks and shares ISA, ask for a full breakdown of the fees charged by the bank, and the fees of the fund itself.

Read our guide below to understand more about how fees can erode your investment returns.

Risk rating

Different funds take different levels of risk. Some are relatively low risk – for example they might invest mostly in cash.

Others are very risky, investing in new, uncertain companies or markets with the hope of higher or faster growth.

And there’s everything in-between. Before you choose any fund, be sure it offers the right level of risk for you.

Under Financial Conduct Authority rules financial advisers should only make recommendations if they know:

• Your knowledge and experience of the investment you invest in
• Your financial situation (e.g. how much money you can afford to lose)
• Your investment objectives, including how much risk you’re happy with (ie. your risk appetite)

Whether you’re buying through an adviser or doing it yourself, always consider your:

• Risk appetite
• Financial situation
• Investment goals, and
• Knowledge of the fund.

And make sure to check the risk profile of the fund suits you.

Information you should be given

Many funds will provide ‘keyfacts’ or ‘key investor information’, covering such points as:

• The risk profile
• How the fund works
• Headline charges (the main fees)
• The investment strategy (for example, is it active or passive – and if it’s active, what sort of things the fund manager will invest in)
• Whether or not you have a right to cancel, how long for and how to do it
• If compensation might be available from the Financial Services Compensation Scheme
• The arrangements for handling complaints and whether you’ll have the right to access the Financial Ombudsman Service

Ways of investing in funds

You can invest in funds directly, or buy them as part of an investment product like:

• A pension
• An endowment policy
• A stocks and shares ISA

If you buy direct, your funds can be put into a tax-efficient ‘wrapper’ such as an ISA wrapper.

Always check:

• The full level of fees
• That you’re comfortable with the risk profile
• That the fund meets your investment objectives
• That the investment firm is authorised by the Financial Conduct Authority