Investing in funds is a great way to ensure that your portfolio is diversified, with minimal effort. Picking individual stocks to invest in is a time-consuming, research-heavy activity. It also puts a lot of pressure on the investor. It’s not easy, as a layperson, to understand all the machinations in the financial industry. Funds take the guesswork and pressure out of investing.
Funds can be organized in a number of different ways. Some funds are directed by a manager. These managers are typically finance professionals with years of experience. Their goal is to help investors beat the competition. Managers want to ensure that their fund outperforms other funds and the market in general.
Funds like this can be income-class or accumulation-class. Income-class funds are a good choice for people like retirees, who use the money to live on. Accumulation-class funds roll gains like dividends back into the fund, to buy additional shares. Funds typically have two types of fees. Firstly, there’s an initial fee, though this can often be avoided by purchasing through a broker. Secondly, there are annual fees for management. Between investments and fees, fund managers can do quite well, even when their funds do not beat the market.
Usually, these funds have a minimum investment for people to buy in. This could be $1000 or $1500. Alternatively, some funds become available as part of retirement plans. For example, some 401(k) and 403(b) plans offer funds that have a target maturity date. This makes it easy for employees to choose a fund based on when they will reach retirement age.
Investment trusts are another instrument that uses a fund-style setup. These are less commonly used. This is partly because managers do not earn commission on them. However, there are also disadvantages to investment trusts. For example, they are traded on stock exchanges themselves. They have a limited number of shares and raising new money means a process of issuing new shares.
Investment trusts can also fluctuate above or below their actual market value. Some investment trusts, however, perform very well. Known as dividend heroes, they increase their dividends annually. The City of London, for example, increased dividends for over 45 years in a row at one point. Some investors put money into both types of funds, to diversify their holdings.