If you think that you do not have the knowledge, time, or inclination to manage your portfolio of investments, you can hand over responsibility for managing your money to an expert fund manager. When you purchase a fund or collective investment, you pool your capital with other savers and pay money managers to make investment choices on your behalf. You choose geography, the asset class, or theme and then the fund managers invest money for you.
Damian Maggio says
that one of the major advantages of funds is that they allow you to build
a diversified portfolio. By investing just a few hundred pounds in a fund,
you can get exposure to far more stocks or bonds than you can invest directly
in the market. In addition, funds allow you to gain access to a range of
geographical markets across the world, a range of specialist asset classes, and
a range of industry segments.
There are two main structures of funds – open-ended and
closed-ended.
- Open-ended funds: You
can redeem cash or invest from open-ended funds at any time. Fund
managers make units or shares for new investors and cancel them when they
are redeemed. This means that the fund size can increase and decrease based
on investor demand – they are open to redemptions and subscriptions. The
price an investor pays is based on the actual value of the underlying
assets.
- Closed-ended
funds: The closed-ended funds are structured as listed companies
and trade like any other equity on the stock market. Once created, they
are typically not open to redemptions and subscriptions. They have a restricted
amount of shares available and any buying and selling have to be carried
out in the open market. This indicates these funds’ costs can differ. The
price of the fund is determined by investor demand in addition to gains or
losses in the underlying assets. The price you can pay for a share, thus,
can either be more or less than what it is actually worth. Fund Manager Damian Maggio says that a closed-ended fund has the advantage of stabilizing the amount
of money with which they invest and can make this structure a better fit
for gradual moving, less liquid asset classes like property.
Funds can either be managed actively or passive, with
positives and negatives for both. The days of an either/or call on active
versus passive look to have passed, but, with most investors blending the two
as part of a diversified portfolio.