While there are many individual fund sectors at a micro level, it is good to understand the two main types on a macro level: Investing for Growth; This is a fund in which its primary objective is capital appreciation, with no or few dividend payouts. Ideal companies within the fund will include those with above average growth in their earnings. Investing for Income; Contrastingly, this type of fund looks at providing an income on regular basis such as monthly or quarterly. Therefore a fund in this section will hold items such as dividend paying stocks and government bonds.
Investing for Growth
- Emerging Markets Equity
- UK Equity
- UK Smaller Companies
Investing for Income
- Fixed Income UK
- Strategic Bond
As the above highlights, there are many possible fund sections to consider, however there are many more than those listed above. The following chart provided by the Investment Management Association provides an excellent summary of the possibilities:
Understanding the charges
To have access to the widest choice of funds, most people will opt to use an online ‘fund supermarket’. When investing in a fund, you will be presented with a variety of charges, but the two main ones are the initial charge and the Annual Management Charge (AMC). The initial charge is usually around 5% of your total investment, however many fund supermarkets discount all of this or a great deal of it. The next feature to pay attention to is the AMC, and this is typically around 1.5%, although some fund supermarkets may provide some relief on this through an ‘annual loyalty bonus’.
Understand the risks
Just like any other type of investments, funds also come with risks. Therefore it is of paramount importance that you understand the associated risks. Analysts are in common agreement that those investing in funds should be able to part with their capital for at least five years for the investment to mature. Similarly, the help of an Independent Financial Adviser should be sought if you are not totally confident with your own investment decisions.
No information provided by Investoo should be treated as a recommendation to buy or sell a particularly investment product. Information is provided on an ‘as is’ basis with the aim of helping you to understand the financial marketplace.