Mutual funds can be a good option for those with little time or knowledge to manage a portfolio of investments on their own.
Some mutual funds are passively managed and aim to match the performance of a collection of assets or a specific index, such as the S&P 500. Others are actively managed, where a professional fund manager builds a portfolio of stocks to try and outperform a benchmark.
You can earn returns through mutual funds in 2 ways:
Remember – no investments are without risk, and you could get back less than you put in. Eligibility criteria and fees also apply. You may also be subject to tax on profits made outside of an ISA.
The value of any tax benefits will depend on your circumstances and tax rules may change in the future.
Common types of mutual funds include:
As the name suggests, multi-asset funds contain a mix of assets in a portfolio (such as shares, bonds, property, and cash). If certain assets dip in value, others may increase – helping you spread your risk. Portfolios are managed on your behalf at a level of risk you feel comfortable with.
Equity funds are a type of mutual fund that mainly invest in stocks (equity securities). Also known as stock funds, they offer the potential for higher returns but also carry the risks associated with stock market volatility and potential losses.
Index funds aim to track the performance of a given index, such as the FTSE 100 or S&P 500. Also known as tracker funds, they typically don’t require active management and offer exposure to a broad range of investments, which can help spread risk.
Bond funds are mutual funds that invest in debt assets, such as bonds issued by companies or governments. They aim to generate regular monthly income for investors. These funds can vary in terms of risk and reward due to the variety of bonds they invest in.
Money market funds invest in low-risk and short-term assets, including cash and government bonds. While they may not provide high returns, they’re designed to offer a relatively low risk investment option for money you may need to access in the short term.
Income funds are designed to provide regular income. They mainly invest in government and high-quality corporate debt to generate interest. Although the value of the fund holdings may increase, their main aim is to provide a steady cash flow.
An open-ended fund, also known as an OEIC (open-ended investment company) or unit trust in the UK, allows investors to buy and sell units or shares anytime.
Both exchange-traded funds (ETFs) and mutual funds involve investing in a collection (or ‘basket’) of stocks or bonds that are professionally managed.
ETFs and mutual funds also offer a wide variety of investment options and are typically seen to be lower risk than investing in individual stocks and bonds. However, there are some key differences:
ETFs are traded on an exchange, such as the London Stock Exchange, whenever the stock market is open, while mutual funds are purchased directly from the company issuing the shares.
Since ETFs are bought and sold on a stock exchange, volatility in the market can influence the value of the fund. For example, demand can drive the price up or below the net asset value. Mutual funds, however, are always priced at their net asset value at the close of every trading day.
Net asset value (NAV) of an investment company is the company's total assets minus its total liabilities. Mutual funds and ETFs use NAV to calculate the price per share of the fund.
ETFs tend to have lower fees than mutual funds. This is largely because some mutual funds are actively managed and require more resource. However, be sure to do your research before choosing, as sometimes it’s not always the case.
ETF fees are also deducted from the fund assets, which means ETF investors do not directly pay these fees to the ETF fund manager.
It’s important to consider your personal finances, goals, and appetite for risk.
Investing should be seen as a medium to long-term commitment. You should be prepared to invest for at least 5 years to give your money the potential to grow and recover from any losses. Ideally, build an emergency fund of 3 to 6 months' worth of living expenses before investing. This safety net can prevent you from having to sell your investments too early.
Our Global Investment Centre is our online fund platform that's designed for more confident investors, as you can make your own decisions. You can invest in mutual funds this way.
New to investing? Our ready-made portfolios could be more suitable if you're getting to grips with investing.
You may also benefit from financial advice to help you make the most of your money.
Minimum investment amount, eligibility criteria and fees apply.
