Understanding Investment Funds

What Are Investment Funds? - Balanced Funds - Emerging Market Funds - Equity Funds
Active Or Index Funds? - Specialist Funds - Risk & Return - Bond Funds - Global Funds - Charges

What Are Investment Funds?
Building and maintaining a diversified portfolio of investments that spreads the risks of investing requires a great deal of effort and investment knowledge. The majority of investors lack the time of experience to give a portfolio the attention it demands. For such investors, investment funds, combined with the 'know-how' of a financial advisor, such as Butcher & Moody, can present a sound individually tailored investment solution.
Stock market investing can be risky and we're constantly told not to put all our eggs in one basket. Investment funds offer an investor the capability to achieve diversification across a range of investments by simply investing into one fund. Sometimes referred to as a Collective Investment Scheme, this fund, under the supervision of a fund manager, pools money from many investors to collectively invest in a selection of stocks, bonds, properties or other financial instruments; thus ultimately providing a diversified investment. Of course, a portfolio can then be diversified further still by investing into many different investment funds that invest in different areas or in different types of investments.
Each collective fund has an objective outlining what it aims to achieve for its investors. This allows investors to choose funds that are appropriate to the level of risk they are prepared to take. the objective can be found on the fund factsheet or prospectus. It is the fund managers' job to create a portfolio that blends different types of shares, bonds and other financial instruments to achieve the objectives of the fund.
As with all investments of this nature, the most important thing to remember is that investment funds should be viewed as a long-term investment.

Active Or Index Funds?
Funds can differ in the way they are managed. Most funds are actively managed by a professional fund manager who decides which assets should be bought and sold, based on detailed research and monitoring of the stock market.
The alternative is an index fund, also known as a passive or tracker fund. Technically, index funds do have managers - but their involvement is significantly reduced. they simply buy all the assets in a chosen index with the goal of matching its performance.
But what is an index? It's a group of stocks chosen to represent a certain market segment, for instance, the FTSE 100 (an index of the share prices of the UKs 100 largest companies). Index funds do not attempt to outperform the equities market, they simply seek to come as close as possible to equalling it.
Butcher & Moody will be best able to recommend whether actively managed funds of index funds best suit your specific investment needs.

Balanced Funds
Balanced funds have the advantage of investing in a mixture of both equities and bonds. It would be common for a balanced fund to have the majority of the portfolio invested in a mixture of these assets, with the remainder held in other classes such as Property and Cash. However, this varies depending upon the objective of the fund.
It is important to be aware of the split between stocks and bonds, in order to fully understand the risks and rewards inherent within that fund.

Emerging Market Funds
An emerging market fund invests in less developed countries that might, potentially, have a very high economic growth. Examples are Brazil, Malaysia, Russia, Taiwan and also larger economies like China.
This high growth potential may be due to a number of factors, such as political or structural changes in the country, for example: privatisaton; liberalisation of trade or better access to capital. The main risks, on the other hand, are political instability and higher reliance on external capital. The financial markets in such countries can, therefore, fluctuate quite dramatically. For a private investor it can be difficult to keep track of what is happening within these markets.

Equity Funds
Equity funds invest in diversified portfolio of shares of different companies and industries.
Depending on the investment strategy, some may only invest in large companies and some only in medium to small companies. There are also funds that will only invest in particular sectors, such as health and telecommunications - offering the investor a diversified investment into a particular favoured industry.
Every fund manager is different; however, there are three broad archetypes when it comes to investments strategies; value, growth and blend.
In general, value funds seek to discover cheap or undervalued shares. This may include shares that the fund manager believes are having short-term problems and are priced low relative to their earnings potential. Whilst there is potential for growth, there is also the risk that these 'undiscovered gems' will remain undiscovered.
Growth funds, on the other hand, as their name implies look for the fastest growing funds on the market. Growth stocks, per definition, are shares in companies that are growing faster than earnings on the broad market.
Managers of growth funds are willing to take more risk to achieve above average earnings momentum. If growth remains strong, these funds reap the benefits, however, as growth slows these funds are likely to fall the furthest. As the most volatile of the three investment styles, growth funds are for long term investors with enough time to make up for short term losses.
Some funds may be a mixture of both value and growth stocks, i.e. a blend fund. In order to judge whether a fund is a good investment for your needs you need to examine the objective and make a judgement - Butcher & Moody will be able to help.

Specialist Funds
Specialist funds give the investor the ability to invest in a specific sector of the economy for which they may have a preference. No matter which sector you are interested in investing in chances are there is a fund that invests in it. Telecommunications; IT and technology; Property; Natural Resources; etc.

Risk & Return
As with all investment, there is a degree of risk. Of course, investment funds can go down as well as up in value. It is important that the investor is comfortable with an investment funds' risk profile and susceptibility for short term volatility.

Bond Funds
In general terms bond funds invest in a diversified portfolio of fixed interest securities, for example, Government bonds and Corporate bonds. The securities within the fund will give the investor an income due to the coupons or interest paid out.
Funds that invest in Government bonds are generally considered to be less risky than funds that invest in Corporate bonds. However, rates are not guaranteed, they can still go up as well as down.

Global Funds
Investment funds can also provide the investor with a geographically diverse portfolio investing in a foreign company shares all over the world.
A truly diverse portfolio should take full advantage of global diversification opportunities; the US market is still the largest and makes up more than half the world market. Europe makes up nearly 21% while UK accounts for only 11% (according to MSCI World Index, May 2005).
If you do not have any specific preferences of countries or regions to invest in, global funds are the easiest way of 'going global'.

Charges
Professional management and diversification are two significant benefits gained by investing in investment funds, but you need to know how much it will cost you.
An investor typically pays a management fee for these services of between 0.5% and 2% per year. On top of this, they will also pay the fund's 'additional expenses' such as distribution fees and servicing costs. these tow charges represent the total expense ratio (TER), which is taken from your funds' performance on a daily basis rather than an annual charge.
There may also be a product charge if purchased within a life product.

and finally: There is no doubting that investment funds offer the potential for growth and a convenient way to diversify risk. However, with such a wide choice of funds available, all with varying performance, objectives and risk profiles - it's important to choose wisely.
To become adept at analysing investment funds and various fund manager strategies, you must have a broad understanding of how investment works.
Butcher & Moody will be able to recommend investment funds that are suitable for your won needs and that best fit your specific risk profile.