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What is an investment fund?

We’re glad you asked! If you’re just getting started with investing, putting your money in an investment fund can be a safer way to invest than choosing individual assets yourself.

That’s because funds invest your money in many different assets. We call this “diversifying” and it means you’re not relying on just one asset (such as shares in one company) to make you money.

Read on to find out how investment funds work and what you should look for when you’re choosing a fund.

What is an investment fund and how does it work?

To put it simply, an investment fund is an account with lots of different people’s money in it. This money is invested with the aim of increasing how much the fund is worth.

Different funds invest differently, for example some won’t invest in companies that build certain types of weapons and some will only invest in fairly “safe” assets – ones that are less likely to lose money.

So, you can choose a fund that matches your morals as well as how much risk you want to take with your money.

How do investment funds make money?

When you pay into a fund, your money is grouped with the money that other people have paid in. You then own part of the fund.

The more money you put in, the more you own. This is measured in “units” or “shares” and the price of the units/shares changes depending on how much the fund is worth. A unit/share might cost you £2 on Monday, but if the value of the fund goes up, it might cost you £3 on Friday, for example. So, if you bought one share on Monday and sold it on Friday, you would have made a £1 return.

Of course, it also goes the other way, if a fund loses value then the unit/share will cost less.

The fund value will keep changing so the price of the units/shares won’t stay the same. That’s because the money in the fund is invested in assets to try to increase its value.

How the fund value changes

Most funds have a fund manager. At OneFamily, our funds are managed by State Street Global Advisors.

The fund manager will use the money in the fund to buy various assets, which are things like shares in companies, bonds and property. This list of assets will change slightly to try to make more money, but the fund’s objective, prospectus and risk profile will stay the same, which means the list of assets won’t change drastically.

For actively managed funds, the asset list is decided, reviewed and changed by an investment professional. Whereas for passive funds, the list of assets is often selected by an algorithm or, if it’s a tracker fund, the list will adapt depending on changes that happen in the underlying index it follows.

Risk vs reward

It’s not always possible to predict what’s going to happen so all funds do sometimes drop in value. If you look at a graph of the fund’s performance over time, you’ll see lots of ups and downs.

This is usually not something to worry about unless a big drop happens at the time you want to take your money out.

But if you are concerned about risk, you can choose a fund that invests in safer assets.

Every fund has a risk score which is measured out of seven. The lower the score, the less risk of the fund value going down, but usually these funds also have less potential to grow than riskier funds do, so you could get lower returns.

For example, our Global Mixed fund has a risk score of 3 out of 7. It’s grown on average 3.3% each year over the past five years*.

Our Global Equity fund, however, has a risk score of 4 out of 7 and has grown on average 7.8% each year over the past five years*.

*As at December 2023. These performances are not guaranteed, what’s happened in the past shouldn’t be relied on to predict the future. These performances include all charges payable.

What are the advantages and disadvantages of investing in a fund?

With fund investments, you benefit from the fund managers’ knowledge or an algorithm that regularly reassesses where to invest, which is helpful if you don’t have in-depth knowledge of financial markets.

And, if you invest in a fund using a stocks and shares ISA, you have the advantage of not having to pay tax on the money you withdraw, no matter how much you make.

But the main advantage for many people is that you are less likely to lose money if you invest in a fund than you would be if you invested in just a few assets on your own.

Nothing is guaranteed and the value of any fund can go down. But because funds invest in many different assets, the chances of them all losing money at the same time is lower than if you put all your money in one place.

The more variety there is in an investment portfolio, the less risk of losing everything, so most funds will spread investments across many different markets and different countries to spread the risk. That way if something happens in one market, it won’t affect the entire fund.

But it can mean there’s less potential to make money as it’s unlikely that every market the fund invests in will grow at the same time.

Whereas, if you chose just one company to buy shares in, how much money you make is entirely based on how well that one company performs. If the share value doubles, your money doubles (minus any fees and taxes).

So, funds are a less risky approach to investing but what you tend to find throughout the investment world is that if risk is lower, your potential to make money is also lower.

How do I invest in a fund?

There are two main ways for individual to invest in funds: using a stocks and shares ISA or an investment fund platform.

Investing with a stocks and shares ISA

Most people invest in funds using a stocks and shares ISA.

With most ISA providers, you’ll be given a selection of funds to choose from when you open the ISA. Remember to check the risk score and make sure you’re comfortable with it!

You won’t choose exactly which assets your money is invested in, but the fund description should give you a fairly good idea of the type of assets you can expect.

You are likely to have to pay a management charge and there may be other fees as well. At OneFamily, we charge an annual management charge of 1.1% of the account value for our Stocks & Shares ISA.

Investing with a fund platform

You can also invest in a fund using a fund platform. Some fund platforms also offer tax-efficient ISA wrappers, but check before you start investing. If your returns aren’t tax-exempt, you may need to pay tax on money you make (if you make more than your Personal Savings Allowance).

Once you’ve created an account, you’ll be able to choose the funds you want to invest in through the platform and log in to make changes and check performance. You will need to pay platform fees and there are likely to be other fees every time you make buy or sell assets, such as trading fees and stamp duty.

We can’t recommend any one platform, but it’s a good idea to check what those fees are when you’re deciding which platform to use.

Investing is a long-term decision

Like with all investing, we recommend only investing in a fund if you’re confident that you won’t need to money in the near future. It’s generally best practice to only invest money that you are comfortable not touching for at least five years.

In every five-year period between 2000 and 2021, stocks and shares have out-grown interest rates** so investing long-term can make you more money than you’d get if you relied on interest rates in a savings account.

However, it can be more difficult to access your money if you need it suddenly and if you need to withdraw money at a time when the fund value is lower than it was when you invested, you could lose money.

If you do have some money that you’re comfortable investing, an investment fund could help you to get started.

**Source: Barclays GILT study 2023. Past performance is not a reliable indicator of future results.

OneFamily's Stocks and Shares ISA

Our Stocks and Shares ISA invests in the stock market on your behalf, so it can be a good way to start exploring investing, especially as it comes with two fund choices.

Like with all investments, the value is likely to go up and down over time so there is a risk that your investment could be worth less at the time you choose to withdraw your money.

Explore Stocks and Shares ISA

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