What is an Investment Fund?
Most people have pensions that have been set up through their work or by a financial adviser, and automatically invest your money in one or more funds or, more technically, OEIC’s (Open Ended Investment Companies) or Unit Trusts. These are the most popular pension investment by far. But what are they? A fund is a wrapper for a group of assets, stocks, shares, bonds, property, cash and sometimes other more exotic things.
Why invest in a fund?
The advantage of owning shares in a fund is that they pool lots of peoples’ money and spread it over lots of different investments. This has several advantages. It reduces your risk, since, if investments go bad, only a small portion of your money is lost, this is called diversification. You could get this sort of diversification yourself by buying lots of stocks individually, but there is a cost for each share trade, so unless you had a lot of money in your pension, the costs would probably mount up so much that you would be better off buying shares in a fund.
Funds also give you access to types of investments that you may not be able to purchase directly. For example, most pension providers don’t let you directly trade on the American stock market. But they will allow you to buy funds listed in the UK which then buy them.
Further Reading