If you’re not confident enough to invest your hard earned cash yourself but don’t want to miss out on the fortunes to be earned from the mystical stock market – you could always look to get someone else to invest on your behalf.
Mutual funds can invest your money for you – all you need to do is find your preferred fund on the stock market and ‘invest’. By doing so, you are giving your money to the fund to invest for you. They will add your money to their pool of investment cash and will invest it into their portfolio of investments. All gains (as a percentage) that the fund’s portfolio makes, you will also make.
Awesome – you know that there is something called a ‘Mutual Fund’ that can invest your money for you… now what? Well, let’s dive a little deeper into what they are, how they work and how to choose a fund that’s right for you.
What are Mutual Funds?
Mutual funds are basically a team of investors who manage a ‘fund’ of money that is an accumulation of all of the cash that individual investors have contributed.
These funds are actively managed by a ‘fund manager’ and a bustling team of financial & investment analysts who are constantly keeping up to date with all of the latest finance news. They are ensuring that all of the fund’s investments (and therefore your investment), is invested in the best place possible to achieve their given objective (some may be growth, others may priorities higher dividend income).
How Do Mutual Funds Work?
We’ve covered what they are – but how do they actually WORK. Well, they make their money by taking a small percentage of the investment funds for themselves.
I know what you’re thinking… ‘if I invest in a mutual fund, not only am I paying fees for the investment platform but I’m also giving a ‘slice of the cake’ to the fund as well?!’.
Think of it this way – would you rather have £9,950 invested after charges, and have a qualified team of professionals moving money in and out of different investments to maximise your returns – even whilst you’re treating yourself to a well needed lay in?
Or would you prefer to have the full £10,000 invested but have to do all of the work yourself and even then, you’re kind of just haphazardly trying to research and spending time working out what to invest in. I know which I’d prefer…
How Do I Find A Mutual Fund?
Perfect – we now know what mutual funds actually are and how they work. Now let’s look at how you can find yourself one to invest in.
It’s super easy to find them – you can go to your chosen investment platform (I personally use Hargreaves Lansdown) and you can actually filter all of the investments available to you so that you can just look at all of the funds you could possibly invest in.
In Hargreaves Lansdown, you simply go to your portfolio and select ‘Deal’ then it gives you an option to ‘Search for funds by manager or sector’:
If you’re not familiar with all of the different managers (such as UBS, JP Morgan, etc.), you can decide a certain sector you’d like to invest in. All you need to know is if you’d prefer to invest into a certain territory i.e. China or into certain investment types i.e. stocks, bonds, gilts, etc.
Which Mutual Fund is best for me?
Now for the final question that you’ve probably got on your mind – ‘this is great and everything, but how do I know which fund is best for me?’.
There are a few things you can do here.
Be Familiar With Investment Types
Here’s a brief overview of each investment type, just so you aren’t going in blind:
- Stocks – buying into a single company;
- Bonds – buying debt from a company or government;
- Indexes – an investment that follows the growth/decline of a given bucket of companies. They are also funds but not actively managed.
- Funds – an actively managed portfolio of investments which you contribute money to (although you now probably know this).
I won’t explain each of these in detail as it’s not 100% relevant to the article, but in terms of funds – there are actually mutual funds that invest in only stocks, only bonds or a mixture of everything.
My personal preference is to invest in a few different funds, this ensures that my investments are as well diversified as possible so that any breaking news doesn’t cause my investments to go through the floor.
Be Familiar With Investment Managers
This is a little harder to do as it’s not like you can refer to a fund fact sheet to see what’s going on behind the curtains.
The real key to selecting an investment manager is to ensure that you are happy with their historic returns i.e. would have been satisfied with your investment’s performance if you had invested 1-2 years ago.
Additionally, ensure you make a decision based on what you actually want out of your investments. If you’re looking to beat the market, you’ll want to choose a fund manager who invests with conviction. When I say ‘invest with conviction’, I simply mean they take strong positions (invest heavily) in a handful of areas.
On the flip side, if you don’t want insane gains but are just happy with low-risk steady growth, you may want to consider a more conservative fund that has investments in lots of different areas i.e. heavily diversified.
Use A Wealth List
I’ll be completely honest – I don’t know if this is available on all platforms, however Hargreaves Lansdown has a Wealth List. This is a list of funds/shares they believe have the potential to make some good gains. However, I’m not sure how in depth their research goes so use this with a pinch of salt.
This tip might not be relevant for some other investment platforms but I definitely think it’s worth a mention.
Summary
To recap – you do have the option to have your investments managed for you by investing into a fund.
Funds work by taking your money, keeping a small percentage for themselves then investing the remaining money into their portfolio of investments. This is managed by a crack team of investment analysts who do the hard work for you.
When selecting a fund, just make sure you choose a fund that aligns with your investment goals and has a proven track record that you’re satisfied with.