The purpose of this post is to try and distil complexity into a simple, digestible format. If done correctly a picture can say a thousand words, so please let me know if I managed to achieve this.
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I hope you enjoy it.
What is a fund?
A fund is a pooled investment vehicle. Investors put their money together and a professional fund manager invests on their behalf.
A fund can give you access to lots of different assets, companies and countries – some of which you may not have access to as an individual investor.
By pooling money together the fund can benefit from economies of scale when purchasing assets and allows for a more hands off approach for retail investors.
What is an active fund?
This is when the fund manager’s job is to ‘beat the market’. You pick these when looking for superior returns and typically pay a higher annual charge for doing so.
The evidence has shown that the majority of active funds actually underperform the market over the long term whilst draining fees from the investors (e.g. 1% per annum) – so tread carefully.
The example shows a UK Smaller Companies fund.
What is a passive fund?
Instead of trying to ‘beat the market’, the fund simply tracks it.
There is no fund manager looking for superior returns, which leads to typically lower fees for the investors (e.g. 0.3% per annum).
The example shows a global tracker fund.
Income or accumulation?
An income unit of a fund aims to generate and pay out a regular income (e.g. quarterly or bi-annually). You typically use these when looking to generate additional income (e.g. whilst in retirement).
An accumulation unit of a fund reinvests the income generated back into the fund. You typically use these when you are looking for capital growth over income.
Thanks for reading!
Tom Redmayne
Financial Planner-in-waiting
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