Influencing your investment choices
Rather than purchasing assets individually, another option is to use the services of an expert professional fund manager who makes informed decisions on your behalf. Investment funds amalgamate capital from numerous investors, granting each participant proportional ownership.
These funds are designed to align with their stated objectives, offering many investment avenues. They provide the advantage of diversification, reduced transaction expenses, and expert management, thus reducing some of the risks associated with individual investing.
Managing your investment portfolio
In this investment approach, you receive periodic updates about the fund’s performance but do not have direct control over investment choices. You can, however, withdraw your funds at any time. One primary reason to invest through a fund is to spread the risk. Even with a minimal investment, you can diversify your portfolio across various asset classes such as bonds, cash, property, equities, countries, and market sectors.
Pooling your money also reduces operational costs, as you share the expenses with other investors. Moreover, the fund manager handles all the transactions, including purchase, sale, and dividend collection, thereby reducing your workload. However, these services incur charges.
The majority of pooled investment funds operate under active management. Here, the fund manager is compensated to study the market and make informed decisions about which assets could yield a significant profit. Depending on the fund’s goals, the manager strives to provide superior growth for your investment (outperforming the market) or to secure more consistent returns than those obtained merely by following the markets.
Passive Management – Tracker Funds
Alternatively, you might opt for a tracker fund that mirrors the market’s performance. If an index rises, so does your fund value, but it will also decline if the index falls. A ‘market index tracker’ emulates the performance of all shares in a specific market. For instance, the FTSE 100, comprising the 100 largest companies based on share value, is a popular market index in the UK.
If a fund invests in all 100 companies in the same proportions as their market value, its value will fluctuate in sync with the FTSE 100. Such funds are known as ‘tracker funds’.
Tracker funds require less active management, leading to lower fees than those associated with actively managed funds. The fees mean that your actual returns might be slightly lower than the market’s growth, but they should be comparable.