Getting to grips with investment funds
Whether you’re a seasoned investor, or just getting to grips with investing, we want to help you feel confident and informed about the decisions you’re making. Central to investing is choosing funds that match your goals. Here we’ll take you through what funds are and things you may want to consider if you’re making a choice about which ones to invest in.
What is an investment fund?
An investment fund is a collective pool of money from multiple investors, managed by a professional fund manager. This pooled money is invested in asset classes such as stocks, bonds and property. Each investor owns units in the fund, representing a portion of the total fund, depending on how much they’ve invested. A professional fund manager takes care of this pot, deciding what to buy and sell to try to make the pot grow in value. This approach makes investing more accessible and manageable for people with varying levels of investment knowledge and money to invest.
Some things to consider when choosing a fund
Some investments offer a single fund which reduces the decisions you have to make. Others offer a choice of funds. If your investment involves choosing funds, you may want to consider the following:-
Investment goals: What are you saving or investing for? Your goals could influence your choice of fund.
Time invested: How long can you invest your money? Longer investment periods could potentially handle more risk.
Risk tolerance: Assess how much risk you’re comfortable with. Higher risk can mean higher potential returns, but also greater volatility, so you could get back less than you invested.
Diversification: There’s also the option to spread your money across different types of investment, which could help to reduce risk.
Imagine you want to save and invest for retirement, which is for example 20 years away. You might choose a mix of medium and high-risk funds to potentially maximise growth over the long term. However, if, for example, you’re saving for a short-term goal, like a holiday in two years, a lower-risk fund might be more suitable, as although they may try to provide growth, their focus will be more on protecting the money you’ve invested.
Understanding your appetite for risk
Knowing your risk appetite is important for making informed investment decisions. The points below could help you assess how comfortable you are with different levels of risk.
Short-term vs. long-term: Saving for short-term goals like a holiday can offer quick rewards but you might miss out on potentially bigger returns. Long-term goals like retirement can handle more risk potentially leading to higher returns, but they need patience and a longer commitment.
Income and savings: If you’ve a steady income and good savings, you may feel you can take more risks for potentially higher returns. But if you overestimate your stability, you might risk too much and weaken your financial security.
Emotional response: Knowing how you react to losing money is important. If you can handle ups and downs, higher-risk investments might work for you. If losses make you anxious, lower-risk options might be better, to avoid you making impulsive decisions during market downturns.
Low risk: Investments like government bonds or cash funds are typically stable and can protect your capital in normal market conditions. However, they offer lower potential returns, which might not keep up with inflation, reducing your purchasing power over time.
Medium risk: Balanced funds or corporate bonds offer moderate potential returns with moderate risk. They can provide a good balance but still carry the risk of losing value, especially during economic downturns.
High risk: Stocks or sector-specific funds, in other words, that focus on investing in a particular sector or industry of the economy can offer potential higher returns but come with higher volatility and risk. This could lead to significant financial gains but also substantial losses, especially if you need to access your funds during a market downturn. Volatility means how much the value of an investment fund goes up and down over time. High volatility means the value can change a lot and quickly, while low volatility means it stays more stable.
You should keep in mind that investments can go down as well as up, so you could get back less than you've paid in whichever fund(s) you are invested in.
How are funds managed?
Fund managers in or who work for regulated investment companies, such as Scottish Friendly, are professionals who manage the investment funds offered by the company. They make decisions about where to invest the pooled money from a group of investors, aiming to achieve the best possible returns based on the fund's objectives. These managers use their expertise to adjust the portfolio as needed in response to any change in market conditions.
While you will incur a cost known as the management charge, investing in a fund can be a more affordable way to invest, than if you were trying to buy assets directly, because you are sharing the costs with other people who are invested into the same fund.
Keep in mind that the value of investments can go down as well as up, so you could get back less than you've paid in.
Scottish Friendly does not provide advice. If you’re seeking advice, you should contact a financial adviser. Advisers may charge for providing such advice and should confirm any cost beforehand.
