Best UK Investment Funds for 2021

While buying and selling individual stocks may seem exciting, investment funds are where the majority of savvy traders put their money. Investment funds allow you to create a diversified portfolio in a single trade and to hedge your bets across market sectors. Even better, the huge number of funds currently available to investors means that you can easily find one that fits your investing goals and style.

So, how do you get started with buying and selling UK investment funds? In this guide, we’ll cover everything you need to know about what investment funds are, how they work, and what advantages they provide. We’ll also highlight three of the top online brokerages that you can use to start investing in funds today.

What are Investment Funds?

An investment fund is a collective pool of money, paid in by investors, that is managed and invested by a fund manager. Since any one investor’s money is mixed in with many others, a fund can purchase shares of a wide variety of stocks and other assets on behalf of all the investors in the fund. As an individual investor, you are now invested in fractional shares of many different companies and you can reap the returns provided by each of those fractional shares.

Importantly, when buying into an investment fund, you give up a fair amount of control to the fund manager. Fund managers decide what assets to invest in with the collective pool of money that they manage. That said, for the vast majority of investment funds, you can see what assets the fund is currently invested in and in what proportions. While this portfolio may change over time, it rarely changes all that quickly since funds need to move a huge amount of money every time they want to buy or sell an asset.

In addition, most funds have a very specific and limited scope that gives you an idea of what the fund will invest in. Some investment funds are targeted around a specific industry sector, such as energy, tech, or real estate. Others simply track one of the major stock indices, thus promising a return that is reflective of how the overall stock market is doing.

Best Brokerages for Fund Investing

ETFs are traded on the stock market, so you’ll need a reliable and low-cost brokerage in order to invest in them. Here are our three favourite online brokerages for buying and selling UK investment funds.

Types of Investment Funds

There are several different types of investment funds, but most investors will need to know about two main types: exchange-traded funds and mutual funds.

Exchange-traded funds (ETFs) are traded on the open market as shares, just like individual companies. The share price of an ETF reflects the value of the assets the fund holds, so you see a return when the share prices of the majority of stocks or other assets in the fund increase. ETFs are easy to access through traditional brokerages, which is an advantage in and of itself for many traders. In addition, the management fees charged by the funds themselves are typically very low for ETFs.

Mutual funds are investment funds that are controlled by an individual firm or brokerage. Whereas ETFs are traded publicly on major exchanges, mutual funds are traded privately. In most cases, you must use the brokerage that offers a specific mutual fund to buy into it. However, some funds are tightly managed and are only available to small, select groups of investors. As for ETFs, the share price of a mutual fund reflects the value of the assets it contains. Keep in mind that mutual funds often charge higher management fees than ETFs.

Investment Funds vs. Trusts

Investors have an alternative to either ETFs or mutual funds for long-term investments: investment trusts.

The main difference between investment funds and trusts is that investment funds are open-ended, while investment trusts are closed-ended. Open-ended means that when investors put money into a fund by buying shares, the total amount of money available for the fund to invest grows accordingly. Closed-ended means that when investors buy shares of an investment trust, the amount of money available for investment doesn’t change.

This may seem like a small difference, but it has important ramifications for how funds operate. Since funds need to be prepared for a loss of capital when investors pull out, they tend to focus on liquid assets like stocks and bonds. Investment trusts are more stable, and as a result many invest in long-term assets like infrastructure, real estate development, or emerging economies.

However, this focus on the long term also changes how share prices move. Fund prices are more responsive to supply and demand, and managers have the option to invest more money to double down on success when investors are piling into a fund. Trust managers, on the other hand, don’t have as much flexibility to respond quickly to market conditions by buying or selling assets.

Advantages of Investment Funds

There are a few key advantages to investment funds that make them an attractive offering for many investors:

Hands-free Investing: For many investors, the number one reason to put your money in funds is that it’s simple. When you buy a fund, you can often leave your money where it is for years or decades at a time. The fund manager will rebalance the fund’s assets as needed to make sure that you’re receiving a return on your money, without any research or action on your part.

Portfolio Diversification: Another major advantage to investment funds is that they enable you to purchase a diversified portfolio in a single trade. You can purchase funds that cover the entire market to spread out your risk across industries and asset classes. Or, if you buy funds in a specific market sector, like tech, you can buy another fund focused on, say, real estate, to balance out your risk. In any case, investing in multiple assets simultaneously through a fund reduces your overall risk to any one company having a bad year.

Access to Assets: Some funds, and particularly mutual funds, offer access to assets that aren’t otherwise available to the public. As an example, a mutual fund offered by a major investment firm may invest in that same firm’s debt, which retail traders could never otherwise speculate on. Funds that invest in real estate often provide access to development projects or properties that aren’t traded in public markets.

Low-cost Investing: One more reason that so many investors like investment funds is that they’re cheap. ETFs typically have management fees of 0.25% or less per year, while mutual funds typically charge fees of 2% or less. When you consider how much you might pay in trade commissions, brokerage fees, and research tool subscriptions to invest in individual stocks on your own, those management fees are extremely inexpensive by comparison.

Choosing an Investment Fund

There are thousands of UK investment funds available to traders, which can make finding the right one for your investing style and goals something of a challenge. But, to help you get started, let’s take a closer look at what you should be considering when choosing an investment fund.

Fund Style

The first thing to think about is what type of fund you want to invest in. Is your goal to track the performance of the overall stock market or a particular industry sector? In that case, you’ll want to look for an index fund. These investment funds typically try to recreate market indices like the S&P 500 and track the index performance as closely as possible.

Alternatively, maybe you want a fund that tries to beat the market. Active funds typically have higher management costs since the fund manager is doing more research and placing more fee-incurring trades. But, many active funds boast a history of outperforming the major market indices year after year.

Finally, what if your goal is to generate steady income? There are many funds focused on dividend investing, which serve to maximise your dividend yield while also generating return on the share price you paid for the fund.

Performance

Performance is the first thing you should look at once you decide what style of funds suits your investing goals. There are often numerous ETFs and mutual funds from competing investment firms that attempt to achieve similar goals, but they may differ widely in how much money they’ve returned to investors over the years. While that could always change in the future, it’s a smart idea to opt for the best-performing investment fund in any fund class.

Along the same lines, you can look at performance to decide between different types of funds. For example, domestic stock funds may outperform emerging market funds for several years at a time. In that case, if you’re simply looking for any broad stock fund, it might make more sense to go with a higher-performing domestic fund.

Cost

Cost is another major factor to consider when choosing an investment fund. Funds typically have an expense ratio (for ETFs) or load (for mutual funds), which is the percentage of your total investment that will go towards management fees each year. Ideally, you want to find the fund that meets your goals while also offering the lowest management fees.

Keep in mind that active funds will typically have higher fees than passive funds. Not only is the fund manager doing more work in researching individual stocks to buy, but all the trades the fund conducts cost money. On top of that, active funds may have tax implications for you at the end of the year, since you’re on the hook for all the transactions the fund made even if you didn’t buy or sell any assets yourself.

Conclusion

Investment funds are a good way to grow your money over time, produce reliable income, and diversify your portfolio to reduce risk. The number of UK investment funds available to traders is large and growing larger, which is a good thing for choice. You can select an investment fund that closely matches your investing style and goals while offering low costs and excellent performance.

Ready to start investing in the best UK investment funds? Use one of our three recommended online brokerages to buy your first fund today.

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