Investment funds offer a golden opportunity to expose your money to the attractive growth rates that can be accessed in stocks and shares. Investment funds pool together the cash from many investors, and a professional fund manager then invests the cash in a range of stocks, shares, and other asset classes, thus cutting the cost of funds investment for each individual, while at the same time spreading investment risk over many companies and investment types.
Historically speaking, funds investments almost always outperform cash and bank account savings in the longer term. Investing in funds is, therefore, a great way to beat the bank! These days, investing in funds can be done through a stocks and shares Individual Savings Account (ISA), so that you gain a tax advantage on your returns as well.
When looking at funds investment, the first step is to be clear in your mind how much risk you want to take. Are you looking for solid funds with low risk and moderate growth, perhaps focussed on large UK and US companies, or are you a more agressive investor, prepared to take a higher risk for the prospect of a higher return, perhaps by investing in the more exotic ‘emerging markets’ of the Far East and China?
The best way of doing this is to talk to one of our expert funds advisers. With just a few simple questions, we can establish where you come on the sliding scale from the very defensive to the very aggressive investor. Alternatively, you can check this yourself online, by answering the same questions using our simple Risk Profiler tool within the Principle First Investment Planner.
Investment funds – which fund should I choose?
There are various strategies for investment in funds. The first choice is whether to choose active or passive investment funds.
Passive investment funds are set up to follow or ‘track’ the index of their respective stock market. Tracker funds invest in various sectors and industries in proportion to the current structure of the index, so that their performance follows the performance of the index very closely. Tracker funds do not, therefore, incur large dealing charges by taking short-term positions (i.e. buying and selling assets often in an attempt to cash in on short surges in the performance of individual stocks).
Tracker funds tend to keep their investments steady in the longer term, prompting the motto for managers of passive investment funds: ‘Whatever you do, do nothing!’
Managing index tracker funds is, therefore, a relatively economical process, making them the least expensive way of accessing investment funds. Some trackers invest to fully reflect the proportions of the index, others pick one stock from each industrial sector represented in an index – a process known as ‘sampling’.
The limitation of tracker funds, of course, is that your funds investments reflect the index, but cannot outperform it for a higher return.
Active investment funds – aiming high
Actively managed investment funds aim to outperform their index with a much more dynamic investment strategy. The fund managers of actively managed funds investments buy and sell stocks regularly in the hope of benefiting from short-term growth in the performance of individual stocks.
This requires extensive research by a team of analysts, as well as much higher transaction costs, and actively managed investment funds charge premium rates, but offer the prospect of outperforming the index (and the index tracker funds described above).
Generally speaking, around one-third of actively managed investment funds succeed in outperforming their index, in any given year.
Principle First Investment Funds Portfolios – taking the heat out of choosing funds
At Principle First we have a range of funds portfolios tailored to all risk profiles. These are groups of funds chosen by our in-house funds experts. They are re-evaluated on an ongoing basis to ensure they are the best performers in their sector, and that their risk level remains in line with the portfolio where we have placed them.
Find out more about investing in funds – make an investment enquiry or ring 0800 678 5929 now
