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How to Invest in Funds UK

Tobi Opeyemi Amure
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How to invest in funds UK

Investing in funds provides a versatile and accessible pathway to grow your wealth in the UK.

In this article, I will detail the ins and outs of fund investing, empowering you with the knowledge and strategies to make informed investment decisions and capitalise on the diverse opportunities offered by funds.

This article was reviewed by Tobi Opeyemi Amure, an investing expert and writer at InvestopediaInvesting.com, and Trading.biz.

What Is a Fund?

A fund is a pooled investment vehicle that allows multiple investors to combine their money and invest collectively in a diversified portfolio of assets, such as stocks, bonds, or other securities.

Managed by professional fund managers, funds provide individuals with access to a broader range of investments and the potential for growth and income.

By investing in a fund, individuals can benefit from professional expertise, diversification, and the convenience of having their investments managed on their behalf.

Types of Funds Available in the UK

In the UK, there is a wide range of funds available to suit various investment preferences and goals.

Some common types of funds include:

  • Equity Funds: These funds primarily invest in stocks or shares of companies, aiming for long-term capital appreciation.
  • Bond Funds: Bond funds invest in fixed-income securities issued by governments, corporations, or other entities, providing regular income and potential capital preservation.
  • Money Market Funds: Money market funds focus on short-term, low-risk investments like Treasury bills and commercial paper, offering stability and liquidity.
  • Index Funds: Also known as passive funds, index funds aim to replicate the performance of a specific market index, such as the FTSE 100, providing broad market exposure at a lower cost.
  • Sector Funds: Sector funds concentrate investments in specific industries or sectors, allowing investors to target their exposure to areas they believe will perform well.
  • Balanced Funds: Balanced funds maintain a mix of stocks, bonds, and other assets, aiming to provide a balance between growth and income while managing risk.
  • Property Funds: Property funds invest in real estate assets, such as commercial buildings or residential properties, offering potential income and capital appreciation.

These are just a few examples of the diverse types of funds available in the UK.

Each fund type comes with its own risk profile, investment strategy, and potential returns.

Active vs Passive

In the realm of funds, two primary types dominate the landscape: active funds and passive funds.

Each operates with distinct strategies and objectives, offering investors a choice between actively managed portfolios driven by professional expertise or passively tracking market indices for broader market exposure.

There are also ETFs (Exchange-Traded Funds), which I will briefly touch upon.

Active Fund

An active fund is a type of investment fund where professional fund managers actively make investment decisions on behalf of investors.

These fund managers utilise their expertise and analysis to select specific securities, such as stocks or bonds, with the goal of outperforming the overall market or a specific benchmark index.

Active funds typically involve ongoing research, analysis, and monitoring, allowing the fund managers to actively buy, sell, and adjust the fund’s holdings based on their investment strategy and market conditions.

The aim is to generate higher returns compared to the benchmark or peer funds, but it also carries the potential for higher fees and risks.

Passive Fund

A passive fund, also known as an index fund or a tracker fund, is an investment fund that aims to replicate the performance of a specific market index, such as the FTSE 100 or the S&P 500.

Instead of actively selecting individual securities, passive funds seek to mirror the composition and returns of the chosen index by holding a diversified portfolio of assets in similar proportions to the index.

This strategy aims to provide investors with returns that closely match the overall market performance rather than trying to outperform it.

Passive funds typically have lower fees compared to actively managed funds since they require less ongoing research and trading activity.

ETF

An Exchange-Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges, similar to individual stocks.

ETFs are designed to track the performance of a specific index, sector, commodity, or asset class.

They offer investors an opportunity to gain exposure to a diversified portfolio of securities in a single investment, providing flexibility, liquidity, and potential cost-efficiency.

ETFs can be bought and sold throughout the trading day at market prices, making them a popular choice for investors seeking broad market exposure and diversification.

How to Invest in Funds in the UK

Investing in funds in the UK is a straightforward process. Here are the key steps to get started:

1. Set your investment goals

Determine your financial objectives, time horizon, and risk tolerance. This will help you choose the most suitable funds for your investment strategy.

2. Research and select funds

Explore the various types of funds available in the UK market.

Consider factors such as fund performance, fund manager expertise, fees, and investment approach.

Conduct thorough research and compare different funds to make informed decisions.

Research different fund themes, analysing factors such as company size, asset type, industry, location and ethics.

Additionally, investors in funds are often presented with a choice between income and accumulation units. The distinction lies in how the generated income from the fund’s investments is handled.

For instance, if the fund holds dividend-paying shares, the income units distribute these dividends to investors as cash. In contrast, accumulation units reinvest the cash by purchasing more shares, thereby increasing the value of each unit in the fund.

Investors seeking regular income may opt for income units, while those focused on long-term growth are likely to prefer accumulation units. Consider your investment goals to determine the most suitable unit type for your needs.

Finally, decide whether you want to use a tax wrapper. Tax wrappers are valuable tools that help minimise the taxes on your investments, providing potential tax advantages.

In the UK, popular tax wrappers include Individual Savings Accounts (ISAs), Lifetime ISA and pensions, which offer opportunities to grow your wealth while enjoying tax-efficient benefits.

3. Choose a platform or provider

Select a reputable investment platform or provider that offers access to a wide range of funds.

Consider factors such as fees, user interface, customer support, and investment options available.

4. Open an investment account

Follow the account opening process provided by your chosen platform or provider. This may involve completing an application, providing identification documents, and agreeing to the terms and conditions.

Deposit funds into your investment account. Decide on the amount you wish to invest and choose the funding method that suits you, such as bank transfer or debit card payment.

Once your account is funded, you can start investing in your chosen funds. Specify the amount you want to invest in each fund and place your buy orders through the platform’s interface.

How to Choose Which Funds to Invest In

Choosing funds requires careful consideration and research to align with your investment goals and risk tolerance.

Here are some steps to help you choose funds:

Define your investment objectives: Determine your financial goals, such as long-term growth, income generation, or capital preservation. Clarifying your objectives will guide your fund selection process.

Assess your risk tolerance: Evaluate your comfort level with risk. Determine whether you are conservative, moderate, or aggressive in your risk appetite. This will help you choose funds that align with your risk tolerance.

Consider your investment horizon: Determine the timeframe for which you plan to invest. Longer investment horizons may allow for more aggressive fund choices, while shorter horizons may require more conservative options.

Research fund types: Understand the different types of funds available, such as equity funds, bond funds, sector-specific funds, or index funds. Evaluate their risk-return profiles and suitability for your investment goals.

Review historical performance: Analyse the historical performance of funds over various time periods. Look for consistent performance and consider how funds have performed during different market conditions.

Assess fund fees: Compare the expense ratios and fees associated with different funds. Lower fees can have a significant impact on your investment returns over the long term.

Consider fund managers: Evaluate the expertise and track record of the fund managers. Research their investment philosophy, experience, and the stability of the fund management team.

Diversify your investments: Spread your investments across multiple funds to diversify your portfolio. Diversification helps manage risk and reduces the impact of poor performance from any single fund.

Read fund documents: Review the fund’s prospectus, fact sheet, and any other available documents to understand its investment strategy, holdings, fees, and risk factors.

Common Fund Fees

Investment fund charges in the UK can include several components.

Here are some common charges you may encounter when investing in funds:

  • Annual Management Charge (AMC): The AMC is an ongoing fee charged by the fund manager for managing the fund’s investments. It is typically expressed as a percentage of the fund’s assets under management (AUM) and covers administrative and management costs.
  • Ongoing Charges Figure (OCF): The OCF represents the total cost of investing in a fund, including the AMC and other additional expenses. It provides a comprehensive view of the fund’s annual charges.
  • Transaction Costs: Funds may incur transaction costs when buying or selling securities within the portfolio. These costs include brokerage fees, taxes, and other expenses related to trading activities. Transaction costs are not explicitly disclosed in the OCF but can impact the fund’s overall performance.
  • Initial Charges: Some funds may have initial charges, which are deducted from your initial investment when you purchase the fund. These charges can vary and are typically expressed as a percentage of the investment amount.
  • Exit Charges: Certain funds may impose exit charges when you sell or redeem your shares. These charges can be based on a percentage of the redemption amount and may decrease over time.
  • Performance Fees: In some cases, actively managed funds may charge performance fees if they achieve certain predefined performance targets. These fees are usually a percentage of any outperformance above a specified benchmark or hurdle rate.

Best Investment Fund Providers UK

Here are some of my top picks.

Hargreaves Lansdown

Hargreaves Lansdown is one of the largest investment platforms in the UK, offering a wide range of investment funds from various providers.

They provide a user-friendly online platform with extensive research tools, fund analysis, and educational resources to help investors make informed decisions.

Hargreaves Lansdown is known for its strong customer service and offers a range of services beyond fund investing, including stocks, bonds, and other investment options.

Read my full Hargreaves Lansdown review.

Account TypeDIY & Ready-made
Dealing Fee (Online)‍£0 (Funds)<br>£11.95 – £5.95 (Shares)
Annual Platform Fee‍0.45% – 0% (Funds)<br>0.45% (Shares – max £45/year)
Minimum Deposit‍£100 lump sum or £25/month

AJ Bell

AJ Bell is a well-established investment platform that offers a variety of funds to investors.

Their platform is designed to be intuitive and user-friendly, making it easy to research and select funds that align with individual investment goals.

AJ Bell offers competitive fees and provides access to a broad range of investment options, including funds, shares, investment trusts, and ETFs.

Account TypeDIY & Ready-made
Dealing Fee (Online)‍£1.50 (Funds)<br>£9.95 – £4.95 (Shares)
Annual Platform Fee‍0.25% – 0% (Funds)<br>0.25% (Shares – max £3.50/month)
Minimum Deposit‍£500 lump sum or £25/month

Bestinvest

Bestinvest is an investment service provider offering a comprehensive range of funds from different fund managers.

Their platform provides investors with access to research tools, fund analysis, and portfolio management features.

Bestinvest aims to help investors make informed decisions by offering detailed fund information, ratings, and expert recommendations.

They also provide a range of services, including pension and ISA accounts, to cater to different investment needs.

Account TypeDIY & Ready-made
Dealing Fee‍£0 (Funds)<br>£4.95 (Shares)
Annual Platform Fee‍0.4% – 0% (DIY)<br>0.2% – 0% (Ready-made)
Minimum Deposit‍£0

Final Thoughts

In conclusion, investing in funds can be a smart way to diversify your portfolio and pursue your financial goals.

By understanding the different types of funds, considering your investment objectives, and selecting a reputable fund provider, you can take confident steps towards building a well-rounded investment portfolio.

Remember to assess your risk tolerance, review fund fees, and regularly monitor your investments to make informed decisions along your investment journey.

FAQs

What are the safest funds to invest in the UK?

Low-risk bond funds, money market funds, and index funds that track stable, established indices are considered relatively safe options for investors in the UK.

What are the best investment funds for beginners?

For beginners in the UK, low-cost index funds and multi-asset funds are often recommended as they provide diversified exposure to the market and are suitable for long-term investing.

What is the best fund type for income in the UK?

Some popular options for income-focused investors in the UK include equity income funds, high-yield bond funds and multi-asset income funds.

Are funds worth investing in?

Yes, funds can be worth investing in as they offer diversification, professional management, and access to various asset classes.

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Will Fenton is the founder of Sterling Savvy. He is a personal finance expert and writes about trading, investing, budgeting, and other financial topics.

Along with his education in Economics & Finance, he has experience working in the financial services industry in London working for one of the UK’s leading financial companies, “a trustworthy and respected provider of news, education and market analysis for the everyday investor”.

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