Investment funds pool the savings of investors with similar investment goals. These savings can then be used to make investments in financial assets such as stocks, bonds and alternatives.
Each fund has its own risk profile and asset allocation, as well as its own investment objectives. For example, some funds aim to achieve capital growth (meaning increasing the value of the investments in the fund) while others favour income (meaning investors receive regular payments in the form of dividends on shares or the yields that are paid on bonds).
In some respects, investing in an investment fund is similar to investing in an individual stock. In both cases, the investor is buying a portion of a larger whole. If the value of the larger whole – the investment fund or the individual company – rises, the value of the portion the investor owns will also rise. This means they will be able to sell the portion they own for a profit.
However, this inevitably creates a degree of risk. If the value of the fund or company falls, the portion of it the investor owns will also be worth less.
Investing in a fund rather than an individual asset such as a stock or a bond poses several advantages to investors. One key advantage of funds is that they enable diversification through investing in a range of assets, which reduces risk. Actively managed funds also offer investors access to the specialist expertise of fund managers.
Active and passive management
|Active management||Passive management|
|A fund manager makes discretionary investment decisions based on their own expertise, with the goal of outperforming the market.||The fund attempts to track the performance of a market index. Rather than attempting to outperform the market, a passively managed fund aims to match the market as closely as possible.|
|Fees tend to be higher as fund managers charge for their expertise. Active management also often involves more regular trading, which incurs further fees.||Fees tend to be lower as human input is minimal and trading tends to be less frequent.|
|Active strategies are generally higher-risk as, in attempting to outperform the market, fund managers usually have to make riskier investment decisions.||Passive strategies are generally lower-risk as they don’t seek to outperform the market.|
|Greater potential upside in the short-term. However, over the long-term passive strategies outperform active strategies.||Less dramatic returns in the short-term, but if you’re a long-term investor slow and steady wins the race.|
Although fund managers in charge of actively managed funds have discretion to invest as they see fit, this is tempered by their responsibility to invest in line with their fund’s investment approach and the best interests of investors.
A discretionary mandate is an explicit investment mandate provided to an asset manager by a specific – usually institutional – investor. Investment strategy, risk profile and asset allocation are agreed upon, and the asset manager manages investments on the behalf of the investor in accordance with these factors.
Discretionary mandates offer investment solutions that are tailor-made for specific investors, whereas investment funds cater to a number of investors so are inevitably more one-size-fits-all.