There are several FTSE 100 index-linked funds in the United Kingdom that have billions of pounds under management. Many of them are passive funds and are very popular among the investing public. This raises the question that if it is only about one hundred stocks then why to invest in a fund instead of directly investing in these stocks. An investor can clearly find with a little bit of research what the constituent companies of each of such funds are and how they are performing. Lets first look at what the FTSE 100 index is and why is it so important, followed by how a fund operates and how an investor benefits by investing in a fund instead of directly investing in stocks.
The FTSE 100 Index is the London Stock Exchangeâs headline stock index and is representative of the top 100 of the largest, richest, and the most influential of all companies that are listed on the London Stock Exchange. The index represents a total market capitalization value that encompasses at least eighty per cent of the market capitalization value of the London Stock Exchange itself at any point of time. The companies that are represented on this index are not only the largest in the United Kingdom but have international operations in more than one country and have a significant part of their revenues coming from these overseas countries. The index until sometimes back was christened as being the barometer of the United Kingdomâs economy itself, the designation now, however, has been passed on to the FTSE 250 Index.
The number of international companies having worldwide operations give the FTSE 100 its unique character and distinction among all other of its cousin indices belonging to the FTSE series. Over a period of time a greater number of companies have joined this index that are either foreign or have significant amount of operations and earnings coming from abroad. This benefits the index in two ways, one it makes it an international index whereby making itself and the London Stock Exchange a representative and center for global finance and capital raising, Second, it protects the London Stock exchange and itself from a meltdown should economic fundamentals or any other risk factor significantly impact the United Kingdom, the host country of the London Stock Exchange. The Index thus is of immense value to investors and business involved in equity market investments to either measure their own investment performance or measure a competitorsâ performance on one hand Â or measure the performance of a particular thematic fund that has been tailored based on this index, on the other.
Before going into detail into whether it is better in general to invest in a fund or directly invest in stocks, it is prudent to consider the current state of affairs prevalent on the London Stock Exchange and the British economy in general. The current economic climate in United Kingdom is deeply aggravated by Brexit. Large scale disruptions in economic activity across the region are certain to happen due to this event. This has prompted business and the general public to curtail their business activities and postpone their expenditure, which has resulted in a short to midterm lowering of growth forecast for the entire region.
The resultant impact on the London Stock Exchange has been two-fold; first the stocks which were to be impacted most by Brexit started to underperform and with its cascading effect the entire market started to underperform; secondly, due to the large scale potential outflow of cash from Bank of England to European Union on account of the Brexit deal, Great Britain is headed into a mid-term balance of payment crisis against major countries, resulting in a devaluation of the Pound Sterling and as a consequence the stocks quoted in Pound Sterling on the London Stock Exchange also started to trade cheaper. This, though looks like a good value picking opportunity, is far more complicated on account of the business fundamentals of the companies either remaining the same as they were before or having even deteriorated.
Given such complicated circumstances it is very difficult to navigate through the choppy undercurrents of the London Stock Exchange. Most importantly the availability and reliability of information is going to be a big problem hindering the decision-making process of an investor or a fund manager. A fund manager always has the benefit of having access to advance tools and valuable in-depth information of the individual companies, sectors and the fundamental macroeconomic indicatorsÂ of a country, which he can make use of to arrive at an informed judgement about the suitability of making a call for investment or not. Whatever cost or otherwise that may be involved in the acquisition of relevant information, usage of advanced analytical tools and management fees is diversified away on account of the large fund sizes that they manage.
Individual investors on the other hand are hindered not only by the lack of knowledge or expertise akin to a professional fund manager, but mostly for the lack of time which is required to be invested to undertake suitable research before making a judgement call on a possible investment target. Fund managers and fund houses constantly keep a vigil on news that may or may not affect the prospects of their investments and make suitable adjustments or rebalance their portfolios. This type of live monitoring of an investment portfolio is extremely difficult to undertake for an individual investor, if not impossible.
Looking at it from the point of a birdâs eye view, there are numerous advantages of making investments into FTSE 100 companies through a specialized fund instead of going it alone. While management fees is one factor one may be concerned about, but when you visualize from a possible monitoring point of view, an investor actually stands to gain by investing in such a fund. Second, investing through a specialized fund entails significant tax savings to the investor in terms of short-term capital gain tax and transaction tax, which when incurred on the fund managerâs level gets diversified away, with least burden on the individual investor.