What you need to know about funds

Fsp Invest, 04 Sep. 2013

Tags: funds, types of funds, nav, net asset value, open ended trust, what are funds, investment trusts,

Newcomers to investing are often wary of buying individual shares. While constructing your own portfolio can be profitable and also enjoyable, many investors feel that they simply don’t have enough time to spend on monitoring their investments. That’s where funds can help. Read on to find out what funds are…

Building a portfolio that’s diverse enough to protect you from a sudden slump in the price of one or more of your stocks can be a challenge, Merryn Somerset Webb explains in MoneyWeek.

This is particularly so if you don’t have a reasonably large amount to invest.

Funds basically take money from thousands of investors and then pool it together to build a portfolio of assets, from shares to bonds to commercial property.

Whilst it only takes about ten stocks to build up a decent portfolio –funds certainly have their place.

For one thing, they are often the easiest way to buy into overseas markets that represent a challenge to even the most confident stock pickers. They can also offer wider access to a sector you might like, without overloading your portfolio with, say, mining shares.

What types of funds are there?

There are two main types…

The ones you’re probably most familiar with are open-ended funds. These are unit trusts.

Investors buy units in the fund. As new investors come along, the fund manager creates new units to sell to them, hence the name ‘open-ended’.

He or she then invests the money to increase the overall size of the portfolio. The value of the units rises and falls directly in line with the value of the underlying investment portfolio.

Shares in investment trusts on the other hand, list on the stock market.

An investment trust is basically a company which is set up to invest in the shares of other companies, such as a REIT (real estate investment trust). These trusts are ‘closed-ended’ funds because the number of shares is limited.

To invest in the fund, you have to buy shares on the stock market.

This means that the share price varies according to demand. So the value of an investment trust can vary significantly from the value of its underlying assets (known as the net asset value, or NAV).

If the shares’ price is above the NAV, they are trading at a ‘premium’. If they are below the NAV, they trade at a ‘discount’.

There you have it, what funds are.

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