Funds – what are they?
Funds, such as Unit Trusts or Open Ended Investment Companies (OEICs - pronounced oiks) are referred to as 'collective' or 'pooled' investments. They are an investment vehicle made up of different types of investments chosen by the fund's manager.
What are the main reasons for investing in funds?
- Funds help reduce an investors overall level of risk
- Funds can lower the cost of building a diversfied portfolio yourself
- Funds reduce the need to select and manage your investments
How do Unit Trusts and OEICs differ?
Unit Trusts enable you to invest in a wide range of investments, but aren't themselves listed on the stock market. They are usually formed by an investment company with the management undertaken by a fund manager. Legally classed as a trust, the assets of the fund are held in trust for its investors.
OEICs are very similar to Unit Trusts, but there is one important difference: they are not set up as a trust, but as an incorporated company. As such, rather than buying units in the fund, you buy shares in the company.
Different funds adopt different investment styles to suit their specific aims
The five main investment styles are detailed below:
As the name suggests, the aim of an Income Fund is to provide you with an income. They can invest solely in shares, buying into companies where the dividend payments are good (known as a high yield), or invest in a mixture of shares, bonds or property.
High-yielding funds which invest in shares tend to focus on companies in mature markets where the strong dividend policy helps compensate for the potential lack of growth in the share price. Of course, fund managers will be looking for companies with strong earnings to fund higher dividend pay outs.
Managers of Growth Funds are usually willing to take more risk to achieve above average returns. If growth remains strong, these funds reap benefits. However, as growth slows, these funds are likely to fall furthest.
The most volatile of the five investment styles, Growth Funds are for long-term investors with enough time to make up for any short-term losses and are likely to invest mainly in shares.
Balanced Funds have the advantage of investing in a mixture of income and growth investments. It is common for such a fund to have the majority of its portfolio invested in a mixture of shares and bonds, with the remainder held in other classes such as property and cash. However, the actual asset classes, and the proportion in each class, will vary according to the objective of the fund.
Funds of Funds
A Fund of Funds is a fund which invests money into other investment funds. The main attraction of a Fund of Funds is the diverse mix of investments they are exposed to.
Fund managers look to ensure they don't have too much exposure in one country or sector by comparing the different investment objectives and actual investments within each of the funds in which they invest.
Fund of Funds managers will also have the ability to negotiate with the underlying fund houses to potentially ensure more favourable dealing terms.
The major difference between Multi-Manager Funds and Funds of Funds is the Multi-Manager fund manager directly seeks different investment managers and gives them the mandate to make investment decisions.
The benefit of Multi-Manager Funds is that you don't have to spend the time finding the best funds - the right mix of fund managers will do this for you.
How are Funds priced?
Funds offer two types of pricing:
- Dual pricing (offer price and bid price)
- Single price
The price is determined by the value of the underlying investments, referred to as the net asset value.
The fund manager will regularly value all the investments in the fund and divide it by the number of units/shares issued, to arrive at the unit/share value. If the fund is dual priced, the offer price (the amount paid for new units/shares) will be higher than this value as it includes a contribution to cover the fund managers' costs and provides for some of their profit. In addition, there's often an annual management charge paid for within the fund itself.
Because fund prices are not usually as volatile as individual share prices, daily price movements tend to be small. As such, a once-a-day valuation is generally sufficient. Place an order to buy a fund after the cut-off time for that day's deals and your purchase will take place at the following day's price.
Where do I find the price?
You'll find the price of most Funds quoted in the financial pages of the daily and weekly papers, typically once a week. You'll also find most brokers show prices on their websites and you can search for funds on share.com too. Sometimes you'll see two prices:
- Accumulation – where any income is rolled up in the fund to increase the value of the fund and the unit price
- Income – where income is paid out to the investor
Placing an order
As most funds are valued on a forward price basis, the price is not known when you place your order to buy or sell units/shares in the fund. Therefore, purchase orders are placed on a value basis (i.e. invest a fixed amount of money, rather than buy a fixed number of units) and sell orders are placed on a quantity basis (i.e. to sell a fixed number of units/shares rather than to raise a fixed amount of money).
How are they traded?
Unit Trusts and OEICs aren't traded between investors, deals are made with the fund manager. For many people the transaction is carried out via a stockbroker such as The Share Centre or other financial services providers.
At the same time, a stockbroker or IFA can often negotiate better terms on the purchase, giving you the benefit of a lower initial charge or even lower annual management charges.
Latest update following Budget announcement 2016:
Following the Budget announcement on 16 March, tax will continue to be deducted from funds and other interest bearing products until 2017. We will aim to purchase the gross class of the interest bearing fund until further clarification.