Investing in funds: the basics

You know the saying 'don't put all your eggs in one basket'? That's what you're trying to achieve when you invest in funds. Funds allow you to invest in more than one asset at once.

You'll hear the word 'asset' a lot in investing. An asset is anything with monetary value, such as shares in a company, gold or property, for example. 

So rather than putting all your money into company shares, bonds or property for example, you're pooling your money with other investors and putting it into a fund that could be made up of shares and property (and other assets as well). Those funds are managed by portfolio managers.

It's not guaranteed: investments can go down as well as up and you could get back less than you invested. 

With funds, you're trying to achieve diversification with your investments – so, for example, if one company's shares go down, another company's might remain stable or even go up.

Lots of baskets for your very important eggs. 

Each fund is made up of a few different assets.  Here are the most common types of asset, known as 'asset classes'.

Cash / money market investments

The attraction of cash is that it’s considered to be a safer way to save. You should also earn interest on that money, which will be free from UK income tax or capital gains tax in an ISA or a pension.

Cash isn't seen as a winner when it comes to long-term returns, and any interest earned on your cash investment can be reduced by charges if they're held in funds. The spending power of your cash could also be reduced by the effect of inflation. That's why cash is seen as a short-term option.

Fixed interest / bonds

Some funds invest in bonds, also known as fixed interest.  Bonds are issued either by governments (government bonds) or businesses (corporate bonds). They're a way to raise money by using the financial markets. A bond provides a regular income during its life and at the end (called maturity) the full value should be paid back.

Bonds are sensitive to movements in interest rates, which can affect bond prices – and the returns you’ll get. There’s also a chance that the government or business won’t be able to repay the bond – this is called default risk. These risks mean that bonds generally offer better returns than cash savings, to attract investors.

Equities

This is another name for shares issued by companies. They give the shareholder a stake in the ownership of a company, which may pay a dividend in cash if the company makes a profit.

Shares are traded on exchanges such as the London Stock Exchange. Funds usually invest in various different companies from all over the world, which helps spread the risk.

Equities are seen as good long-term investments as they’ve historically delivered returns that have beaten inflation. The downside is that their value can go up and down often and by large amounts, depending on market conditions. 

Property

In pensions or ISAs, property investing means commercial property. Funds usually invest in a wide range of property types, including retail units, offices and factories. Your investment is used to buy properties such as these, which are then let out to companies who pay a rental income.

Like the other asset classes, the value of property can go down as well as up and you could get back less than invested.

You've got two choices when it comes to how your funds are managed – actively or passively. 

Actively managed funds

Actively managed funds are looked after by a fund manager who makes all the investment decisions. They'll monitor the market and decide what to invest in or when to buy and sell assets, aiming to outperform an investment benchmark or index. For example, a fund that invests in UK company shares will be aiming  to outperform the FTSE (Financial Times Stock Exchange) All-Share Index®.

Why choose an actively managed fund?

• The human touch: the benefit of a fund manager's judgement and expertise.
• Flexibility with investments.
  
• Potential for higher returns than the benchmark.

Passively managed funds

In comparison, the fund manager of a passively managed fund or index fund aims to replicate the performance of an index, such as the FTSE (Financial Times Stock Exchange) All-Share Index®, rather than outperform it. 

Why choose a passively managed fund?

• Usually lower charges.
• Tracks the performance of the benchmark.

To invest in funds, you'll need to use an investment platform. It's like a supermarket, but instead of buying food, you're shopping for funds. Aviva's investment platform offers four ways to select the funds you want to invest in. 

Universal Retirement Fund

Our Universal Retirement Fund is designed to give you a simple way to save for retirement, with pension investments you don’t have to manage. The mix of investments in your Universal Retirement Fund at the start will be based on the time until you retire. In the early years, the Universal Retirement fund is invested in company shares to grow the savings. As retirement approaches, we’ll automatically change the investments in the fund so they’re typically less risky. 

Ready-made 

Ready-made funds are a good option if you're new to investing because they do the hard work for you. All you have to do is choose how risky you want to be with your investments and you'll be presented with a portfolio made up of funds to match that level of risk. Aviva keeps it simple with four risk levels: Lower, Lower to Medium, Medium to High and Higher.

Experts' shortlist

Some platforms offer a shortlist created by experts that you can pick your funds from. It's essentially a list of best-buys: funds that fund managers think will perform well.

Shortlists are a good option if you want more control over the individual funds you're investing in, but don't want to plough through everything available. It's worth noting that though the funds are picked by those in the know, there's no guarantee that funds in the experts' shortlist will perform any better than those in the full range.

At Aviva we monitor the funds in the experts' shortlist on an ongoing basis to ensure the funds continue to meet our selection criteria.

The full fund range

It's possible to build a bespoke portfolio by choosing from all the funds that Aviva has to offer. Sounds daunting? Usually an option for confident investors.  

Although some funds try to achieve a mix of both income and capital growth, others will only focus on one thing; growing or generating an income. Which approach you choose depends on your financial goals and future plans.

Ask yourself this: are you in a position to leave your money alone for a while in the hope that it grows as much as possible, or would you rather aim to get some money back regularly?

Sustainable investing aims to incorporate ESG factors into investment decisions, like funds. ESG stands for Environmental, Social and Governance which are factors increasingly being used by fund managers to identify risk and opportunities when investing. For environmental factors, fund managers look at things like a firm's energy usage, its climate change policies, and waste production. In terms of social factors, fund managers will consider the health and safety of a firm's employees. With governance, fund managers will examine how businesses are run. This includes management quality, board diversity, and conflicts of interest. Fund Managers may also obtain sustainability labels for their funds if their funds meet that criteria. You can find out more about sustainable investing here.