Earlier this week a client asked me a very valid question; “what exactly IS a fund?”. Well, as contrived as it may seem, it was next on my agenda as a blog topic! So here goes…
Recently we discussed what an asset is; a fund is simply a vehicle to house all the assets in which you invest.
Imagine you went shopping, you pick up some spinach, grab the milk, those biscuits you totally planned not to buy and then the family pack of toilet roll (which for some strange reason, we are all secretly a bit embarrassed about buying! As though we are The Queen).
The problem is, if we try to carry all this stuff around individually, it will quickly become problematic and no doubt we will drop a few items along the way.
That’s why God gave us the trolley!
(Just in case you are from Barnsley; in this analogy the shopping items are the assets and the trolley is the fund).
The second advantage is down to something called economy of scale.
Imagine you wanted to buy your local rugby league team. On your own it would be impossible, but if everyone in the community chipped in, you might just pull it off!
The same thing happens within a fund, your money is pooled together with lots of other investors to create a huge amount of capital. Because of this, the fund is able to tap into assets and asset classes that you as a private investor would have no opportunity to access. Furthermore, because the fund has such a vast amount of money to take to market, it can negotiate better terms = buying power!
Convenience
Another big advantage is convenience. If you wanted to achieve an element of diversification, you would probably need to invest in a wide range of assets and asset classes. If you were to do that on an individual basis, that would create a plethora of paperwork and tax reporting (#nightmare).
Investing in a fund removes that issue as you would pool your money into the fund – the fund itself does all the legwork; ergo, you achieve the requisite diversification, but with much less paperwork
Cost
As you would expect, there will be a cost for this service. There are thousands of funds out there to choose from and cost should be one of the items for you to consider when deciding which is best for you.
The figure you are looking for is called the Ongoing Charge Figure (or OCF) and is typically expressed as a small percentage.
Summary
A fund is a pooled investment in which you club together with other investors. The fund then goes to market and invests in ‘stuff’ on your behalf. You pay the fund a small percentage in return for convenience, access, economies of scale and diversification.
For most people – a fund is the way to go.
(Investments can go up or down and there are no guarantees. Past performance is not an indication of future performance. You may get back less than you invested).
Remember that you can send me an email at planning@claritylfp.co.uk if you have any questions about investing or any other financial matter, or if there is anything you would like me to cover in a future blog.
Until next time…
Financial Planner | Financial Adviser | Investment Advice | Pension Advice | Insurance Advice | West Yorkshire
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