Why funds are a great place to start investing
For first-time investors who find the idea of selecting individual shares daunting, funds could be the answer.
Imagine your ultimate food shop. It only stocks the things you like and has everything you could ever want. Then, there is another shop next to that, with all your favourite fashion labels under one roof – and one next to that with a combination of both.
If you transfer this way of thinking to investing, you get funds. Funds are an easy way for first-time investors to access the stock market because they bundle shares from different companies together in one easy-to-buy package – to save you the trouble of picking individual shares.
There are more than 4,000 funds to choose from in the UK market. Wherever your investment interests lie, there is likely to be a fund that covers what you are looking for. If you are interested in investing in technology companies for example, there are several funds that invest solely into companies from the technology and telecoms sector. You can buy funds that only invest in UK companies, funds that cover the whole globe or you can choose "multi-asset" funds, which invest in a whole range of different types of investments, from gold to property to shares.
Pooled resources
Funds are "collective investments", which means that your money is pooled together with money from other investors and is managed by an experienced professional. This is the "fund manager".
As they have a bigger pot of money to play with, the fund manager has more flexibility and buying power than you or I. Funds are also cost-effective, as you get exposure to a whole range of companies for a single fee.
Spreading your risk
Funds can help to reduce the risks involved in investing. If you buy shares in just one or two companies and they perform poorly, you could lose the money you invested. However, funds usually invest in anywhere from 30 to 100 different companies – sometimes even more – from a variety of regions and sectors. You should bear in mind, though, that only investing in funds within a single sector, for example technology, carries more risk than investing in funds across many sectors.
The technical name for spreading investments is "diversification". It means that you reduce the risk of selecting one or a few firms which do badly. Of course, it also means that you may sacrifice the possibility of choosing the one or few that do well. You have a better chance of getting an average performance.
Remember, as with any investment, the value of funds can fall as well as rise, and you may get back less than you invested.
Leave the decisions to the professionals
When a whole market goes down in value, so too does the value of many companies' shares. Funds can be well-placed to weather the storm, however, as they are managed by an experienced professional.
A fund manager looks at companies objectively and buys what they feel is good value for money – not just what happens to be 'on trend' or fashionable.
Spotting when to buy into certain sectors, companies and regions – "asset allocation" – is a fundamental part of successful investing, but buying and selling individual shares to switch to where the opportunities lie can be time consuming and expensive. A fund manager, however, has the luxury of being more nimble and they will do all of the research required on your behalf.
Keep the tax man at bay
If you hold funds within an Investment ISA or a Self Invested Personal Pension (SIPP), you can make even more from your money as both offer tax advantages, but you must remember that tax treatment varies depending on your circumstances and can change. An added bonus is that if you hold an ISA or SIPP with Barclays Stockbrokers and it is invested only in funds from the Barclays Funds Market then you pay no annual fee for your ISA – it is free!
Interested in funds?
There is a lot of useful information on funds in the Barclays Funds Market including some How2 video guides which show you how to find, research and trade funds online.
Previous insights
Opening and managing an ISA is easy
Setting up an Investment ISA is simple. With your National Insurance number and bank details to hand, you could be picking your first investments in as little as ten minutes. Online access makes it easy to check on how your ISA is performing and make changes to your investments whenever you like.
