What is the best way for me to invest in a fund?
You may be aware that there are various ways of investing in mutual funds and investment trusts – collections of shares, bonds or other financial securities. This article is all about finding an approach to fund investing that works for you.
Before we look at direct investment, fund platforms and advisers, there are a few main issues we need to consider and key questions we need to ask when investing in funds.
Weighing up risk and return
The first thing to remember is the more risk you take, the higher your potential returns and the higher your potential losses. There is a full spectrum of risk and possible return to consider – a government bond fund, for example, is thought to be ‘less risky’ than an emerging market equity fund, but the latter could potentially make you higher returns.
So, before you invest, ask yourself: how much money do I need to make and how much risk am I willing to take to reach my goals?
Then you have to strike the right balance between risk and return with your investments. So, the question becomes: what fund or collection of funds will best represent my investment goals and tolerance for risk?
Answering these questions correctly could be vital to your success as an investor. That’s why the way in which you invest is such a critical part of the process.
- Do you have time to conduct the extensive research and will you come to the right conclusions if you invest directly with a fund manager?
- Would you be better served by the lack of administration and the choice that comes with having everything in one place on a fund platform?
- Maybe you're concerned that you’ll make the wrong decisions; in which case, is it best you leave it all to an experienced adviser?
Your personal finances, investment knowledge and the time you have to manage and monitor your investments will decide which of these routes works best for you.
Here are ways in which you can invest in funds.
Option 1: Direct investment
How does direct investment work?
Direct investment is investing directly with the fund-management business itself.
Once you've done your research and decided that particular fund meets your return objectives and you're comfortable with the risks involved, it's time to invest.
Most fund managers allow you to sign up online, where they conduct an appropriateness test to ensure you're eligible to invest in the funds you're interested in. They'll then ask you for a minimal initial investment, usually £500 to £1,000. After that, you can set up a regular direct debit for an amount you're comfortable with.
What about fees?
Fund investment also comes with a number of charges – an initial charge (this is usually waived), an annual management charge that pays for the running of the fund and sometimes an exit charge when you want to withdraw your capital. Many of the charges associated with fund investment come under the banner of ongoing charges, which covers a number of small payments.
Dependent on the type of fund, you may also be charged a performance fee when the fund outperforms its own performance target.
Is this the right choice for you?
What do you do when you’re all signed up and invested with a fund manager and you want to diversify?
By which we mean, what do you do when you want to spread the risks you’re taking by investing in different kinds of funds. Often, this will mean investing with different fund managers. That’s more research, more online sign-ups, more direct debits to set up and various different charges all making their way to different companies. There’s also more literature to read and performance factsheets to check. Basically, more administration.
This is the problem platforms aim to solve.
Option 2: Platforms
How do platforms work?
Platforms allow you to buy and sell funds, and manage and monitor your investments all in one place.
With these online tools, you can see a range of products, arranged in a transparent way to help you construct a portfolio of funds that work for your risk and return goals. You can see investment objectives, what the funds invest in and compare past performance across shares, bonds and a number of other asset classes.
Many of the funds you see on platforms will be out of reach for many investors if they were to go directly to the fund manager. Funds with a particularly high initial investment for direct investors, for example, are often significantly lower when purchased from a platform.
Not only do you get a wealth of investment opportunities, you can also keep track of the investments you’ve made via the platform, and buy and sell part or all of your investments at any time. All of your funds being under one banner has other advantages too. Tax management, for example, is simplified by having your ISA, personal pension and standard investments all together.
What about fees?
With a platform, you have one fee that covers everything you’re invested in, rather than several small charges, so you usually pay a little less than if you were investing through several fund managers directly.
Platform fees will usually take the form of a percentage of holdings, which work on a sliding scale – the more you invest the less you pay – or a fixed fee.
The fixed fee offers greater transparency, but you will likely be charged for buying and selling funds, which is often not the case with a percentage fee.
Is this the right choice for you?
Bear in mind, you won’t have access to every fund. Fund platforms don’t carry everything and some do not carry investment trusts at all.
And perhaps choice is not that important anyway.
If you’re happy investing in one fund that has a return target that can meet your goals and a level of risk you’re comfortable with – there’s no need for such an intermediary.
Option 3: Independent Adviser
How do independent advisers work?
Whether you’re investing directly in a fund or through a platform, what you invest in is your decision.
But if you don’t feel comfortable making those decisions, perhaps because your finances and investment goals are more complex, or you don’t have the time to conduct the research required, there are financial advisers who can help.
The adviser’s role is to know everything there to know about your finances, your short- and long-term goals, and your tolerance for risk. You are more likely to invest in products that suit your needs and financial circumstances if you use an adviser.
Like platforms, advisers also have greater access to lower initial investments and funds that aren’t offered directly to retail clients, as well as funds offered exclusively through advisers.
What about fees?
Adviser fees – on top of your platform or direct fund fees – depend upon a number of factors. But the good news is, advisers are required to be up front about how much they charge.
Some charge an hourly rate, some charge a flat fee and some take a percentage of the amount invested. If your finances are more complicated, there’s a good chance your fees will be higher.
Is this the right choice for you?
The thing to remember about a financial adviser is that the fees on top of your fund expenses can be high. But finding the right investment opportunities for you can be worth the price, especially if your finances are more complicated and you have a larger amount to invest.
However, if you’re comfortable investing directly or navigating a platform, the services of an adviser may be a surplus to requirements.
What if I have a significant amount of capital that I want to invest?
If you don't think that directing in funds is the right choice for you, you could go down the discretionary fund management route.