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The first rule of Bronni’s Investing Club is that I’m not a financial adviser, the second rule of Bronni’s Investing Club is you can both lose AND gain money when you invest, there is risk involved.
So you’ve got some money all ready to invest. The world is your oyster, you can put that money into almost anything you like! But the choice is pretty overwhelming, and the risks are significant.
What is a fund?
A fund is a collection of stocks and bonds put together by a human being or a robot. When you buy into a fund, you’re buying a proportional chunk of this collection. So if 2% of the fund is invested in Apple, 2% of your chunk of the fund is invested in Apple.
You pay a % to the fund manager for being invested in their fund. How big of a percentage you’ll pay will depend on the type of fund it is.
The special thing about funds is that even when you invest only a small amount, your money is being spread across many companies, bonds or even international markets. It should mean that your investment is more balanced and less vulnerable to normal market fluctuations. In short, it’s a ready made portfolio.
It’s not so expensive to dip your toe in
Funds are usually quite attractive to new investors because you’re only charged a % fee for buying into it. Whereas, if you buy a share in just one company, then you might get hit with a flat rate dealing fee, plus stamp duty, which makes investing small amounts pretty unaffordable.
I always find it easier to show you what this means with real numbers.
I’m going to compare investing £25 in one popular Vanguard fund vs spending £25 to buy shares in a FTSE company. This is simplified as I’m not going to include platform fees (which should be the same for a share or a fund anyway).
Investing in a Vanguard fund
Fees = 0.23% ongoing charge
After a year if that £25 investment didn’t grow at all, it’d be worth £24.94.
One FTSE share bought through a Fidelity stocks and shares ISA
Fees = £10 dealing fee + 0.5% Stamp Duty Reserve Tax
It just cost you £25 to get £14.92 worth of stocks. However, apart from platform fees, you won’t pay any more to own it, indefinitely.
See what I mean? It’s a pretty big difference when you’re only investing a small amount.
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If you have a pension, it’s probably already invested in funds
It would be really dumb if your pension provider put all its eggs in one basket. If you want to be sure, log into your pension and try and find the investment factsheet.
What type of fund can I buy?
The choice you’re going to be faced with will depend on the type of platform you’re using. If you’re signed up to a new fangled robo investor like Moneybox you might not have much of a choice. On Moneybox there are just three risk options – cautious, balanced and adventurous. Each of those options is actually a collection of funds, you can click through to find out what they all are on the Moneybox app.
What type of fund should I buy?
There are a few types of funds out there, they sound very complicated but there’s only two things to remember really.
Your fund will either be actively or passively managed.
This means exactly what it sounds like it means. Either your fund has someone sitting there tweaking the stocks and bonds inside it, or it doesn’t. It doesn’t mean your passive fund never changes, but instead that the changes are made by an algorithm instead of a human being.
The difference you’ll notice straight away is the fees. I am invested in an actively managed fund where the ongoing charge is 0.95%, and a passively managed fund where the ongoing charge is 0.22%. It doesn’t seem like a big difference, but compound interest works both ways.
Getting bogged down in the jargon? I’m sorry! I’ve written this investing terms glossary to help you out.
Broadly, the aim of an actively managed fund is to beat the market, while a passively managed fund will try to follow the market. The market does tend to go up in value; the FTSE 100 index is the UK’s top 100 companies for share price, here you can see its performance since 1995. However, both the market as a whole, and a fund trying to beat it can go up and down. We all remember 2009, right?
What’s in a name?
Your first clue about what a fund is all about is in the name of it. I’m going to break down the names of a few popular funds so you’ll be more clued in when you’re searching for something to invest in.
Vanguard LifeStrategy 80% Equity Acc
So, Vanguard is an investment platform. However, you can invest in this fund even if you don’t have a Vanguard account, but basically they’re the one making money if you choose to invest in it.
This is just marketing. Vanguard have a few LifeStrategy funds, the idea behind them is that you can leave money in them for a long time. But as we now know, all funds can go down as well as up and there are no guarantees.
Okay, we should have learned about equity when we read my investment glossary, right? Pretty much, equity is shares in companies. Historically choosing stocks (aka shares) instead of bonds is a strategy that can be more volatile, but could offer higher returns. Things that aren’t equity (bonds, property, precious metals etc.) tend to be more reliable, but could also grow in value more slowly. So 80% of this fund is companies, the rest is other stuff. There are LifeStrategy funds with anything from 20% – 100% equity, and the higher the percentage the more risk you’re taking on (theoretically).
Short word, but this is important. When you’re looking at funds, the same ones might come up more than once, but with one word at the end changed, or it might have a note next to it. This will indicate the class of the investment, either income or accumulation (inc or acc). The key difference is that with accumulation any profits you earn are automatically reinvested into that fund, and with income they’ll be added to your account as cash. If you’re leaving your money in there for a while and have no desire to be in your account playing with your investments all the time, accumulation is probably better for you. Especially when it comes to pensions, because your money is going to be in there long term, and compound interest is magic.
Fidelity Index World Fund
This one’s easy.
That’s an investment platform, but you can invest in this fund from other platforms too.
An index tracks a market. There are loads of markets, and you might have heard of the FTSE, S&P, NASDAQ or Nikkei indices. They cover geographical regions, different industries, company sizes, etc. Basically, an index will go up or down depending on how well their particular market is doing. They’re taking an average across them, so your investment in an index fund will do as well as the market as a whole, minus fees. Fees should be low on an index fund, because it’s passively managed.
The index this particular fund is tracking is the MSCI World Index. I found that out by clicking through and reading the investment information sheet.
You should now know what a fund is. There is also a note in the investment factsheet saying this is an accumulation fund.
Cool? Cool. Right, so if you understand funds, it’s a great place to start your investment journey. If you have any questions hit me up in my Facebook group.