An investment fund pools together money from lots of clients. An investment manager then invests that money in accordance with the investment strategy as set out in the fund documentation. Funds can invest in any type of asset: stocks, shares, bonds, commodities and even other funds.
Trusting investment experts
A fund manager is appointed for each fund to invest its capital and deliver a return for investors. The fund manager will usually consist of a team of investment experts, who should have relevant experience and a track record in accordance with the investment strategy.
Once you have chosen a fund, you will be able to sit back and relax as the investment manager undertakes the work of sourcing, reviewing and selecting each investment for the fund.
Each fund should have a well defined investment strategy. This should give you a clear indication of the nature of the assets to be held by the fund and the risks your money will be exposed to.
By selecting a handful of investment funds you can quickly and easily build up a well diversified investment portfolio.
A helpful checklist to find the best investment for you.
1. Portfolio diversification
Most investment portfolios consist of a mix of shares (equities) and bonds. You may want to looks for funds that invest in these, or look for alternatives such as property and commodities to invest in, to create a more diversified portfolio.
2. Risk vs Return
What level of risk are you willing to accept - funds will put your capital at risk, and you need to be prepared to lose money as well as make money. Riskier funds may target a higher return, but could also result in larger losses.
3. How long do you want to invest for?
Fund investments are best viewed over a minimum 3-5 year period. If you are looking for a 'quick win' then funds are unlikely to be the right choice for you.
Review the biographies of the senior Investment Team - do they have a good level of investment experience (ideally a minimum of ten years), and are their interests well-aligned to you - for example, do they invest alongside you in the fund.
5. Track record
How long has the fund been operating (ideally three years), and has the performance been in line with the stated target.
What are the trading fees - these are paid to the fund manager, or to intermediaries such as brokers and investment platforms. Initial fees tend to be higher for longer term funds, to motivate investors to keep their capital invested in the fund for a minimum period of time.
Funds will also charge an ongoing annual management fees. These should be low for trackers funds (e.g. 0.25%) but may be higher for funds that need to source and manage the underlying investments (e.g. 2% for private equity funds).
7. Research and reviews
Once you've done your own diligence on the fund documentation and presentation materials, see if you can corroborate this with third-party reviews, preferably from professional companies such as Morningstar, Defaqto, etc. Consumer reviews such as Trustpilot are less likely to provide you with meaningful insights.
8. Tax efficient wrappers
You may want to restrict your fund selection to those that can fit within specific tax-efficient wrappers. These can range from SIPP and SSAS for pension investors; ISAs for everyday investors and IHT (Inheritance Tax) for estate planning.
Choosing a tax wrapper should follow the investment decision, not lead the investment decision.
9. Listed or unlisted
There are more and more specialist unlisted funds. These provide less liquidity than a listed fund; but can reduce the daily price volatility and also be a good source of uncorrelated returns.
Most unlisted funds are restricted to High Net Worth (HNW) investors and Sophisticated investors for regulatory purposes.
10. Investment instrument
Funds are usually structured in three ways: as a Company, as a Unit Trust or as a Partnership. The structure will impact how your return is reported and paid to you, and possibly have some tax implications.
There isn't a 'clear winner' in terms of the best fund investment instrument - it will be chosen by the fund manager to be attractive for investors and appropriate for the asset class.
There are thousands of investment funds in the UK alone. Finding the best ones which are suitable for you can be a time consuming task. To simplify your search, funds are split into two groups: listed and non-listed funds.
Listed funds will be traded on a stock exchange. This may be on a main-stream stock exchange such at the FTSE or smaller exchanges such as Ireland or even the Channel Islands (e.g. Guernsey's ISX).
Every exchange has a list of funds available for investment, and will provide a price (or quote) for each one. In the UK, the FTSE and AIM are the two most popular exchanges for funds.
Listed investment funds should have greater liquidity than non-listed funds, but may be more volatile in terms of daily pricing.
Unlisted investment funds are not listed on a stock exchange. Unlisted funds will be available as a financial promotion either through an intermediary - such as a wealth manager - or directly from the investment fund manager themselves.
Unlisted investment funds are increasing popular for specialist fund managers, and they tend to be more cost effective than listed funds if the fund has less than £250M of assets under management (AUM).
Unlisted funds tend to be restricted, so that retail investors cannot typically invest in them.
The BondMason Core fund manager has three full years of delivering a consistent return of 6% p.a. from loans secured against UK property.