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5 reasons to invest in funds

This is an article about funds and how they relate to investing in general.

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Reasons to invest in funds

Deploying experts to carry the load

Funds provide an investment option for people who don’t have the time, expertise or inclination to build and manage their own set of investments.

The reasons for investing in funds haven’t changed much since they started to appear on the scene in the 19th century.

In its prospectus of 1868, arguably the first British fund said it aimed to provide the “investor of moderate means the same advantages as the large capitalists in diminishing the risk of investing”.

In other words, funds were devised to give people who might not otherwise have the time or expertise, a way to invest.

1. A common theme in investing is to diversify your assets. Because mutual funds are a basket of investments, they provide diversification without the need to go out and buy a whole bunch of individual company shares and bonds yourself.

2. Managed funds offer professional financial expertise. A stocks & shares fund, for example, may employ analysts who spend their days investigating companies to see if they’re worth buying or not. Most people can’t match this level of effort, or expertise, in their spare time.

3. Funds offer convenience and transparency. Most funds can be bought or sold easily and quickly (usually within one working day). In financial jargon, this means they are a relatively liquid investment, which means you can jump in or out without delay or penalty. Moreover, fund prices are public and accurately reflect the value of the assets held.

4. Even a single share in a company can be expensive. Google, for example, has exceeded $1000 per share. Because you can’t buy less than one share, building up a broad portfolio can be tricky if you are an everyday investor. Getting a whole basket full of investments with a fund is achievable with a minimum investment of £500 or less.

5. Because they buy and sell relatively large volumes of shares, fund managers enjoy economies of scale such as reduced brokerage fees when trading.

Two of the most obvious downsides, meanwhile, are:

  • Fees charged by fund managers, which drag down performance. These fees are taken from the fund itself, so it may not always be obvious how much is being charged.
  • Choosing a fund can be a daunting business, given the bewildering choice of the thousands available. This makes it easy to select a fund that underperforms and fails to generate the returns you hoped for.

Related links

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  • Choosing quality mutual funds

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