Investment funds are pooled investments that are managed by experts known as asset managers, actively or passively by making investments from the pool in various asset classes with different risks associated with them. These asset managers charge a fee to manage these investments which is a function of the assets under management in the pool. These investment funds come handy to the common investors, as they do not have to time the market in order to make profitable investments. The investors can choose to enter or exit the pool as per their convenience in most of the cases, without timing the market, except the closed-ended investments. These investment funds offer investors, protection, transparency, liquidity, diversification professional management and in some cases tax benefits as well.
Risk and Inflation are important aspects of any investment, which are an important part of our life, as at some point of time in life we need to retire and at that juncture we need our savings to sustain our lifestyle. As it is a future event, it needs to be taken care of in present and it is an ideal way to start financial planning early in life. Investments can be in the form of land, property, gold, securities and many other asset classes. All these investments are direct investments and come with different risks associated with them. The investors should be aware of these investments and their associated risks in order to make such kind of investments.
However, for a certain section of the society which is not financially literate or is not aware of these asset classes, or have absolutely no idea about making investments, the investment funds are a popular choice of making investments. The main thing which make investment funds differ from other kind of investments is, people with lesser income contributing to their savings in form of smaller amounts over longer period of time, with power of compounding to create wealth over a period of time without really taking care of management of these assets, also factoring their risk appetite.
Investment funds can be in the form of Equity funds, Bond funds, Money market funds, Mixed/ Balanced funds according to the fund strategy, Real estate funds, Infrastructure funds, Private equity, Hedge funds, Commodity and many more. All these funds have associated risks with the investments they make in their portfolio. To summarize, in general, there are equity funds, debt funds and balanced (mix of both) funds.
The asset management companies create their funds according to various risk appetites of the investors. As these funds are professionally managed, and generally don’t turn into losses. In addition, most of the investment funds (except hedge funds which are moderately regulated due to their nature of risk) are strictly monitored and regulated, investors are provided with comprehensive information about the fund manager and its portfolio of assets.
How does a portfolio manager invest?
Investment funds can be broadly classified into two categories: Active funds and Passive funds. Active funds are based on a strategy considering the risk appetite of the investors and the research of the fund manager. For instance, if a fund manager in designing a portfolio for risk averse investors, most of the securities in the portfolio would comprise of the debt instruments with high credit ratings. On the contrary, the passive funds mostly replicate index funds which track the market index. The index comprises of the companies listed on the exchange. The company which performs poorly will automatically go out of the index and the good performing company will find place in the index. Hence there is no need to research individual securities. Therefore, passive funds are the ones who replicate the index funds. In addition, the passive funds are relatively cheaper, as they do not require a fund manager and have a lesser expense ratio.
In the end, while making a choice, the gist is the time horizon for continuing investing. The longer the investments, the better it is. Another important thing to consider, is the level of risk one is committed to take. These investments can be made thorough financial institutions which would be slightly costlier or directly from fund houses or online fund platforms.
Investment funds in UK
According to some media reports, the inflows have increased specifically in the equity funds in December and reached new highs, post the Conservative party’s resounding election victory in the United Kingdom in the last five years. According to some research and media reports, the investors in the United Kingdom invested double the funds in December amounting to £1 billion as compared to previous high attained in July 2015. Out of the £1.5 billion that was ploughed into UK equity funds during the last year, only December’s contribution was of £1 billion. There was a positive sentiment in the market due to Boris Johnson’s decisive election victory along with clarity on Brexit.
Since December 12, the FTSE All-Share and FTSE 100 indexes were up by about 5 per cent. The equity funds in the United Kingdom were not performing well till the time of election as people were not sure if Jeremy Corbyn’s Labour party too was being predicted to come to power.
Before the elections, during 2019, the pooled investments saw outflows of around £5.4 billion; with the third quarter observing the maximum redemptions with Brexit uncertainty and elections around the corner. However, it seems that trade negotiations will certainly improve as the United Kingdom is likely to exit the European Union on January 31, 2020.
Top 5 popular Investment funds in the UK
- Fundsmith Equity: The fund primarily invests in large cap stocks which have a contribution of around 87 per cent of funds in the composition of the entire portfolio. The sector allocation is diversified and includes Financial Services, Healthcare, Technology and Industrials. The fund aims to achieve growth in value in the long term.
- Vanguard Life Strategy 80% Equity: The fund primarily invests in a blend of securities with 80 per cent of funds in stocks and remaining 20 per cent of funds in fixed income securities with medium credit quality. The sector allocation includes Financial Services, Healthcare, Technology, Industrials and Consumer Cyclicals. The strategy of the fund is passive, and it aims to generate income as well as capital appreciation in the long term for its investors.
- Vanguard Life Strategy 60% Equity: The fund primarily invests in a blend of securities with 60 per cent of funds in stocks and remaining 40 per cent of funds in fixed income securities with medium credit quality, suitable for investors with medium risk appetite. The sector allocation includes Financial Services, Healthcare, Technology, Industrials and Consumer Cyclicals. This fund follows a passive investment strategy.
- Lindsell Train Global Equity: The fund has a bit aggressive strategy as it invests 98 per cent of its funds in the stocks. This fund is suitable for investors who have a longer time horizon and a higher risk-taking ability. The sector allocation includes Communication Services, Financial Services, Consumer Cyclical and Technology.
- Vanguard Life Strategy 100% Equity: The fund primarily invests in stocks which have a contribution of around 99 per cent of funds in the composition of the entire portfolio. The remaining 1 per cent include property and cash. This fund is passively managed fund and aims to generate income and capital returns through a diverse blend of securities.
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