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.
If you like my content please subscribe and follow me on Twitter and Instagram for similar posts.
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
Latest from the Blog
The Wealth Creation Machine
“Are you looking to build wealth?” “Do you want to secure your financial future?” “How about free money every month?!” If you answered “YES” to any of the above questions… YOU NEED A PENSION! Pensions are in somewhat of a marketing crisis. They are more important than ever, but chronically misunderstood. ‘Pensions’ are seen by … Continue reading The Wealth Creation Machine
Memento Mori: Carpe Diem’s Older Brother
The gods envy us. They envy us because we’re mortal, because any moment may be our last. Everything is more beautiful because we’re doomed. You will never be lovelier than you are now. We will never be here again. Homer, The Iliad Personal finance is much more than numbers and equations (if only it was … Continue reading Memento Mori: Carpe Diem’s Older Brother
The Death of Alpha
One of the most profitable industries in the UK thrives on chronic under-performance. In this post I dive headfirst into the ongoing war within the investment industry, Alpha vs Beta. Active vs Passive. Complexity vs Simplicity. Good vs Evil… Before we get stuck in, here’s a quick overview of the key terms: Alpha and Beta … Continue reading The Death of Alpha
One thought on “What is a fund?”