What are the benefits of investing in funds rather than directly in shares?
Many people start their investing journey by buying shares in one or more companies they are familiar with, but holding individual shares in just a few businesses can be a risky approach.
That’s because you’re essentially putting all your eggs in one basket, so if the company or companies you’ve invested in suffer a setback, your portfolio could be severely affected.
Investing in funds, however, which involves a fund manager pooling your money together with that of other investors and using it to invest in a wide range of securities, can help reduce risk.
Here, we explain why diversification matters and look at some of the other benefits of investing in funds rather than directly in shares.
Access to a broad investment universe
Funds can invest either in one asset type or in a range of assets including bonds and property, allowing investors access to a broader investment universe than shares. Multi-asset funds, for example, can hold a combination of shares, bonds, property and commodities, as well as other funds.
In addition, funds enable investors to access a wide range of industries, geographical areas and markets. For example, there are funds which invest specifically in the US, Europe, Japan, China or other regions, and funds which focus on specific sectors, such as technology or property.
Holding funds which invest in a diverse range of assets and stocks can help manage volatility, as these investments are unlikely to always move in the same direction at the same time.
For example, when you invest in bonds, prices depend on prevailing interest rates and on their credit rating. With shares, however, prices can be affected by a wide range of issues, but the main factors which influence them are how well a company is performing and economic conditions. Even companies which are doing well can see prices fall in a difficult economic climate.
If one asset class or investment underperforms, the hope is that others in the portfolio will offset some or all of these losses.
Investing in single companies, however, is much riskier, as individual share performance relies solely on the particular company concerned.
Funds typically fall into one of two categories. They can either be passive funds, which deliver a return in line with the market, or active funds, where a professional fund manager will pick the investments he or she thinks will beat a stated index or benchmark.
An advantage of actively managed funds is that investors can benefit from the experience and expertise of the portfolio manager and investment analysts, who can react to current market conditions and seek out opportunities that might be otherwise hard to find.
If you’re investing directly in shares, it’ll be down to you to research which companies you want to buy into, which can be very time-consuming – and potentially difficult to access all the information you need.
It’s important to remember that there are no guarantees that any active fund will outperform, so some may lag behind the benchmark they are trying to beat. Investors should also bear in mind that the extensive research that goes into choosing investments for an active fund means that they will typically have higher charges than passive funds.
If you’re investing in individual shares you must pay fees each time you buy, and again when you sell. If you trade regularly and hold a significant number of shares in your portfolio, costs can soon mount up.
It’s often cheaper to invest in a managed fund rather than directly in a wide range of individual shares, although charges can vary widely depending on the fund chosen.
When you invest in funds, you’ll pay an annual management charge which is a percentage of the money you’ve invested. However, the Ongoing Charges Figure (OCF) provided by the fund manager can give clearer picture of actual costs because it includes the main ongoing costs taken from the fund the previous year as well as the annual management charge.