Investing & Risk
This page includes some of the good reasons for making investments into ‘funds’ run by ‘fund managers’ on behalf of the investors.
Whether you are looking at investing in a pension, an investment bond or perhaps using a New Individual Savings Account (NISA) you might consider using investment funds. Put simply, a fund is a collection of many different people’s money in one place. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power.
Typically, these pools of money are run and managed by investment specialists who are paid to make the day-to-day decisions as to where the pooled money is invested. Rather than individuals (who have no interest in markets and shares, or who don’t have the knowledge or time to study market information) choosing which shares to buy, to hold and to sell and at what time, the fund manager uses their expertise to make suitable investments in order that the value of the pooled fund will hopefully grow over time.
Diversification and Risk
Another advantage of pooled investment is being able to diversify.
All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount you originally invest. To enable funds to be able to manage the risks the manager will usually practice some level of ‘diversification.’ This works on the premise that holding two different shares is better than two of the same shares. This is because all shares react differently to investment conditions and changes.
For example, imagine that there are only two companies, one making T-shirts and one making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the T-shirt company as they expect demand for T-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling the other is able to support and perhaps offset the falls, meaning that the investor doesn’t suffer a loss.
All investments carry some risk, and the Investing and Risk page includes some information on how we might manage this risk. We can learn more about the particular risks and rewards of different investment funds by looking at their sector and assets in more detail.
All types of shares have different characteristics and these can be complex. Hence there are fund managers within the industry to assess and measure these features and make investment decisions based on their knowledge and market experience.
Investment funds will have a particular aim, and often have a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund (the investments made by the fund manager on behalf of individual investors) remain in proportion with the selected aims and specification of the fund.
Sectors and Assets
The fund sector identifies broadly the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry. For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in ‘technology’ companies (IT, telecoms etc). In addition to this there are sectors that are a mixture of assets. A typical ‘balanced managed’ fund will have some money invested in shares, some in property and some in fixed interest investments or bonds.
Although there are no guarantees as to performance or returns from any sector, our knowledge and experience can indicate how we might expect investments to perform.
Inheritance tax planning
- Savings plans including ISAs
- Savings and Investments
- Individual and group pensions