Investing in Funds: A Beginner’s Guide

Highlights:

• A fund offers investors a means of pooling money together with other individuals and invest indirectly in an assortment of assets, enabling investors to buy units within a company.
• From active and passive funds to investment trusts, funds come in various forms, while there are differences in the way in which they are managed.
• Funds are popular with both new and seasoned investors since they are a safer option due to diversification, while a fund manager can select the assets that perform well so that potential results lead to better returns.
• Considered less risky, funds can give you access to a variety of geographical markets, asset classes and industry sectors, offering flexibility and diversification.
• Yet, funds also carry some risks such as that the performance of each individual fund can be impacted depending on the asset class you invest in.
• Some funds to consider include the 3% Malta High Income Fund that invests in well-known local companies and the 4.25% Emerging Market Bond Fund that offers investors exposure to fast-growing markets.
• Interested to invest in funds but not confident enough to go at it alone? Seeking help from a professional is your safest bet. Our fund managers dedicate their time in researching and picking the best opportunities for you in any given sector so that you have a better chance of benefiting from greater returns.

A convenient and easier way to invest, funds are popular with both novice and experienced investors alike and whereas risk is unavoidable in all asset classes, funds can be a great way to get you going since they offer diversification across a number of different investments.

Here we give you the low-down on everything there is to know about funds so that you can better grasp their benefits and complexities and invest with confidence.

What are funds and how do they work?

A fund is a way of pooling your money alongside others to invest indirectly in assets such as shares, bonds and other securities depending on the investment goal of the fund. This means that unlike shares whereby you are the direct owner of a piece of a company, with funds you buy so-called units within it, which represent a portion of ownership in the fund.

With many, there is no limit on the number of units that can be issued, while the number of people who can invest in them can be vast and for this reason, they are also commonly referred to as open-ended investments. The units’ price, also known as the Net Asset Value (NAV) is calculated based on the price of the underlying investments held in the fund less the total liabilities. As the value of the underlying investments increase or decrease, so will your fund’s NAV.

What make funds so popular?

Thanks to pooling your money with other people, funds are ideal for investor novices since they are a relatively safer route as opposed to other securities such as shares, for instance, where you shoulder the risk alone. Typically, a professional investment manager will use the money to buy and sell a wide range of investments on your behalf so as to achieve a fund’s objective and meet investors’ ultimate goal which is to grow their money.

If a fund manager selects assets that perform well, then the value of your investments will increase over time, however, always keep in mind that investments rise and fall so you may get back far less than what you had originally invested. Enlisting the help of a fund manager can potentially result in better returns and proper risk management, while the fact that a professional is making the investment decisions for you, will help take off the pressure of selecting and managing your investments yourself.

Have a look at our ultimate guide to finding the right advisor.

What are the different types of funds?

With several different types of funds available for you to invest in, there are also differences in the way in which they are managed.

Broadly grouped into actively and passively managed, here is what sets them apart:

Active Funds

With this type, a manager is actively managing the fund depending on current market conditions, while it involves thorough research and analysis. The fund manager aims to beat similar funds in what is known as benchmark indices.

For instance, the FSTE100 measures the 100 largest companies with the highest market capitalisation listed on the London Stock Exchange (LSE). Over time, they will buy and sell different assets depending on market conditions.

What kind of actively managed funds are there? One popular type is open-ended funds or unit trusts. These are created by fund managers for new investors and get cancelled once they are redeemed.

Passive Funds

A convenient and low-cost way to gain exposure to a broad range of investments, passive funds are also known as index tracking funds and aim to match the performance of a particular stock market index, often by investing in every share in the index being tracked. Unlike actively managed funds which need additional work and analysis by a fund manager, these carry lower ongoing charges.

Investment Trusts

Traded on the stock market rather than directly through a fund manager, investment trusts are close-ended funds so they have a limited number of shares and unlike other types which tend to be valued once a day, investment trusts have a share price which moves up and down in value when the stock market is open. Generally speaking, these require more sophisticated techniques than your typical funds, making them a higher risk investment.

What do funds invest in?

Most funds are commonly defined according to geography (whether they are European, Chinese or emerging markets), industry-based (such as utility firms or industrial businesses), company size and the type of investment (corporate or government bonds). This means that funds invest in a variety of things, such as:

• Global stock market funds: these distribute your money across the world’s largest stock markets. So, for instance, 45% of your money may be invested in the UK, 10% in the US and 6% in Japan.
• Country-specific stock market funds: if you would rather not spread your money across the globe, you have the option of investing in countries you are more familiar with such as your own. With these funds, you invest in assets found exclusively in your country.
• Multi-asset funds: from shares, corporate and government bonds, property and commodities such as gold, multi-asset funds allow you to hold a wide mix of assets.

What are the benefits of investing in funds?

From accessing a variety of geographical markets, asset classes and industry sectors to obtaining exposure to far more stocks or bonds that you would by directly investing in the market itself, funds are worth considering. Here are a few more advantages:

Diversification

Bearing in mind that funds enable you to invest in a single product but in a variety of securities, sectors or geographies, investors can achieve diversification and the ability to do so with your investments reduces any potential risks.

Safety

Protected against insolvency, the investment assets do not belong to the fund company but instead, they are held separately, which means that should something happen, your fund assets will not be affected. What’s more, both investment funds and providers are subject to strict legal requirements.

Flexibility

With such a wide variety of funds available, you can decide on the ones that best suit your financial objectives. For example, mutual funds gather money from numerous investors and invest it in a diversified portfolio of assets, whereas hedge funds invest in assets of high-net-worth individuals (HNWI) or institutions – defined as those who hold financial assets with a value greater than $1 million – which can help you earn above-market returns.

Professional help

Funds tend to be popular amongst investors because they usually offer access to a ready-made investment portfolio by an expert in a particular field. With the necessary skill set and experience, fund managers can take investment decisions following thorough and rigorous research so that you can benefit from a number of things like tapping into economies of scale.

Transparency

Generally speaking, funds are perhaps one of the financial products that come with the most comprehensive information, typically in the form of a prospectus which sets out the rules under which the fund will be managed. This is crucial since it enables you to compare different funds before buying, while you can gain access to information about their performance, as well as half-yearly or yearly financial reports.

What risks are involved?

As is the case with any form of investing, the value of investments and any income from them can rise as well as fall. In addition, there are several factors that can impact the performance of each fund with the risks largely based on the asset class you invest.

Pulling out of the market as soon as a fund dips or trying to guess when it might reach its peak is close to impossible, so ideally you should drip-feed your money over time to significantly reduce the risks. Drip-feeding is the process by which you advance funds slowly into stages rather than injecting a large sum right from the start. And remember to carefully consider the investment objectives, risks, charges and expenses before investing in any type of fund.
Find out more about the benefits of drip-feeding.

Some funds to consider for your portfolio

Malta High Income Fund

Ideal for those who would like to gain exposure to the local market be it local equities, local bonds and government bond market, the Malta High Income Fund distributed 3% in the last twelve months and invests in well-known Maltese companies listed on the Malta Stock Exchange.

Have a look at how the Malta High Income Fund can help you invest in local companies you trust.

Emerging Market Bond Fund

A unique investment opportunity offering equal parts of risk and reward, emerging markets can provide strong investment returns at a faster pace. Distributing 4.25% in the last twelve months, the Emerging Market Bond Fund is the ideal investment for those looking to gain exposure to the emerging markets through both corporate and government bonds.

Find out more about how you can invest in the drivers of global growth with the Emerging Market Bond Fund.

Interested to invest in funds but not confident enough to go at it alone? Seeking help from a professional is your safest bet. Armed with the appropriate expertise and knowledge, our fund managers dedicate their time in researching and picking the best opportunities for you in any given sector. They will ensure that any risks are minimised by investing in multiple assets and that you invest for the long-term so that you have a better chance of benefiting from greater returns.