If you’re just starting out in investing, putting money into funds is a great way to begin, as the level of risk is minimal. As savings rates are currently at an all-time low, long-term investment into funds is a great way to maximise your capital in the long run. That said, remember that the value of savings and investments can go down as well as up. It is always advised that when investing, you consider things in the long-term (around 5-10 years time). The longer you can invest for, the more likely it is that you will reap rewards in the long-term.
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How funds work
A fund is very different to a share of a company. With a fund, you place your money into a collective pool of capital along with other investors. All people in the fund benefit from how the fund performs. For this reason, it is less of a risk than purchasing shares, which can fall sharply and make a loss at any time. You purchase ‘units’ in a fund, which can increase or decrease in value. You can calculate the value of your investment by multiplying the price of every unit within your fund by the number of actual units there are. When purchasing funds, you should always allow an investment time of at least five years for your savings to mature and hopefully grow. Cash in your units too soon, and you could make a loss. If you need access to any money you are considering putting into a fund, this type of investment may not be for you.
How do I buy funds?
Funds can be purchased via a fund platform, (otherwise known as a fund supermarket). You can also purchase funds through a financial advisor, who will arrange the purchase and take care of the paperwork for you, but this will cost you a fee for their services. Many fund platforms can be found online and work in a similar way to an e-commerce site that enables you to buy, sell and hold funds across a wide range of industries. To use a fund platform, you must visit the platform of your choice and then browse the various funds on offer before selecting one. You will pay a fee for using the platform to obtain the funds, and to buy the funds themselves. The fees you pay will depend on the platform you use, so this is something to consider when you are weighing up how much you can afford.
Investing on a frequent basis is a great way to ride out the many ups and downs of the market. If you pull your funds out of a market at the wrong time, you can lose money. It is also important to invest in different categories of funds. These categories can range from emerging markets to utility, energy and gas firms, corporate bonds, shares and gilts. Many investors have a portfolio that spans across many of these areas, as it gives them greater financial stability when one fund may be making a loss or underperforming.
Fund management
It is possible to hire a fund or asset manager who can manage your funds for you. A fund manager will buy and sell your funds when they spot a good return, monitoring the market constantly to ensure that you are always getting the best deal. You will however have to pay for their services.
Fund charges
When selecting a fund platform, you have to keep in mind the charges that are imposed. You don’t want a substantial part of your investment to be wasted on paying high fees to an investment platform. Look out for cheaper platforms and those for investment beginners. Both the funds you purchase and the platform fees will cost you money. Such charges will be deducted from your account and given to the fund manager. You’ll need to pay a platform charge, which is either a flat fee or a percentage of your fund value, so the more value you have in terms of funds, the higher the fee you will pay as a platform charge.
It also costs to trade funds. Every time you buy or sell a fund on an investment platform, you’ll be charged a fee. These fees can be up to £25 per fund. Some platforms have no fees at all, which is why it’s best to shop around, or ask one of our advisors from Financial Advisor UK for their advice on the right investment platforms for your budget. If you are thinking of making several trades in a single year, opting for a platform with minimal or no fees is a worthwhile option.
If you move your investments from one platform to another, you will also be charged a ‘transfer out’ fee. This fee is calculated in accordance with the value of your investment funds. The greater the value, the more you’ll have to pay.
If you have an investment manager, you’ll need to consider their fee if they are managing your investment portfolio for you. A manager will always take a percentage of the money made on trading investments, and this averages at 0.75%. You should receive regular updates from your fund manager on how your investments are performing, so you can calculate the amount they will receive as a cut.
Selling funds
You can sell funds through the same online platform that you used to buy them, and this can usually be done from your account. Some platforms will also let you sell funds through phone apps. When you log in to your account, most platforms will give you the option to select either ‘buy’ or ‘sell’ in terms of the funds you’d like to trade. If you hit ‘sell’, you’ll be indicating that you wish to sell a fund. Keep in mind that funds are sold in relation to ‘forward pricing’. This means that you’ll get a price for the value of the funds the next working day, as the price is calculated by shares sitting in that fund. Trading needs to stop for that day before the share price can be finalised. Fund prices however do not fluctuate as much as shares.
Once you have received the capital from selling your funds, you can either choose to keep the money or reinvest in something else from the same platform. Always bear in mind that markets can generally go up and down. If everyone else is selling their funds, it doesn’t always mean that you should follow suit. Have a game plan and stick to it. If you’re unsure, consult with one of our Financial Advisor UK professionals before trading in investments.
Holding funds
You can hold funds through a trading platform, or you can invest funds within a pensions scheme, or an ISA ‘wrapper’ scheme. These schemes are designed to legally avoid tax. If you decide to hold funds in a trading platform or in an account, you have complete control over how much you buy/sell, without restrictions on the amounts you can invest. You will however have to pay tax on these funds.
If you decide to hold funds in a pension scheme or an ISA, you might be able to benefit from legally avoiding tax. It depends on whether or not you have maximised your capital gains tax allowance. If you sell an asset that is worth over £6,000, you have to pay tax on it. An ISA will let you invest £20,000 before tax. It is always worth speaking to a financial advisor through Financial Advisor UK before making any important investment decisions for your future such as investing in pensions and ISAs.