What are investment funds?
If you don’t like the idea of trying to choose individual investments or want to gain exposure to assets that can be difficult to access, investment funds might be a good option.
Investment funds pool together the money of multiple investors and give you a stake in a portfolio of assets, which could include shares, bonds, property, cash or a mixture of them.
The value of your investment then rises and falls in line with those assets.
Active versus passive
There are two main types of investment fund - actively managed and passively managed.
Active fund managers make regular investment decisions on your behalf, such as which shares to buy and when to sell them.
They aim to make higher returns than that of the market, or a specific benchmark index.
Passive funds effectively track a specific market or index in an attempt to match its returns.
For example, the fund manager might buy all of the shares within the ASX 200 index, in an attempt to emulate its performance.
These funds, which are also known as tracker funds, are cheaper to invest in than actively managed funds.
Exchange traded funds are an increasingly popular type of passively managed fund.
What are the benefits?
Investing in a fund gives you access to a range of assets through a single investment, so even if some of them don’t perform well, others might do, which spreads your risk.
Funds can buy the component parts of a portfolio for a much lower cost than you could by yourself, because they buy in bulk and get lower prices for shares and bonds.
There’s a huge range of investment funds, including ones with assets that would otherwise be difficult to access, such as international shares, commercial property or infrastructure.
What are the risks?
The value of investment funds can fall as well as rise and there is no guarantee that an actively managed fund will perform better than the market and many do not.
When you invest in a fund you have to pay an annual fee to the manager. While this may seem like a relatively small amount, it is very important to keep an eye on these costs as they can eat into your returns and cause your investments to underperform in the long run.