What Is a Fund?
This is the first blog in a short series on how to pick the best fund. As a financial adviser and pension specialist I speak to a lot of people about picking the right investments for them. In the modern world of financial planning this means picking funds. Simply put, a fund is a collection of different types of assets that are put together so you can invest in a single entity rather than picking all the individual elements separately.
What’s the benefit of a fund?
When you’re investing money there are two main drivers to which you are trying to achieve which means that a collection of different assets is usually the best way to go:
1) Capital Growth – firstly, and probably most obviously, you want your money to grow. This means picking assets that are likely to grow over time
2) Risk Mitigation – The problem with Capital Growth is that it can be risky. Your investments might go up or might go down. Although we all want to make money, we don’t tend to want to lose money.
The mixture of the two means that you cannot just invest in a couple of investments, because the more likely one is to make money, it probably will give you too much chance of losing your money.
What’s in a fund?
In theory, any type of asset can be in a fund, but there tend to be some usual suspects:
1) Government Bonds – You give the government loans in exchange for regular payments. These are very safe investments, as a government usually must fail for you to not get your payments. But because they’re so safe you won’t get very large interest payments.
2) Company Bonds – You guessed it, like the Government kind, but a company rather than a government. Less safe and more return.
3) Equities – the fancy word for stocks and shares. This is the subject for a later blog post; these can be stocks in any company worldwide. Stocks in large stable companies tend to be safer with less growth, whereas start-ups in the emerging world could go big or bust.
4) Property – Commercial property or residential property. This can be a good way for you to invest in these markets without buying a place. We all know the benefits and risks of this type.
While there can be other assets, you can now see that investing in a fund allows easy access to all these markets.
Why don’t we pick individual stocks?
Financial Advisers tend not to pick individual stocks anymore but rather select from a range of funds created by specialist institutions. These funds allow investors to create a diversified portfolio that maximises their returns without unacceptable levels of risk.
The adviser's job is to help you plan your finances and act as your guide in the financial world. At Parker Financial Advice, we have regular meetings with the fund managers to understand their strategy and help our clients pick the appropriate funds for them.