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How to make investing easy

When you invest money in a stocks & shares ISA using collective funds (also known as mutual funds), rather than buying a specific share or basket of shares directly, you enjoy the benefits of simpler administration, lower costs and professional fund management.

When you invest money in a stocks & shares ISA using collective funds (also known as mutual funds), rather than buying a specific share or basket of shares directly, you enjoy the benefits of simpler administration, lower costs and professional fund management.

You don’t have to consider and act upon the various corporate actions of the companies that you’re invested in. Nor do you have to undertake the buying and selling of shares or account for and reinvest any dividends paid out on your shares. This is all taken care of by the administrator of your ISA funds – your investment manager.

Investing in the shares of just one company exposes your money to a risk of total loss if that company goes out of business. Funds can avoid this risk by pooling your money with other investors to buy a broad spread of different companies’ shares, so that if one share within your fund crashes in price – the price of your fund only falls by a small percentage.

Funds that invest in just one or two sectors of the economy can be riskier. For example, funds that invested only in bank shares were badly hit in the financial crisis. Or funds that invested only in technology companies lost about 90% of their value in less than three years in the dot.com bust that occurred between 2000 and 2003. A broad based stock market fund, on the other hand, will hold several shares in companies from any given sector of the economy and will hold shares in companies from many industry sectors too.

Investing in a fund can help you avoid being over-exposed to risks in specific companies or specific industry sectors. And you can achieve some risk reduction either by holding all the shares in your chosen market through an index tracking fund, or through an actively managed fund. Or a mixture of the two.

Index tracking funds may have an advantage in cost terms, and can work well as a core holding, particularly when you don’t want or need to generate returns that are higher than the overall stock market. However, you need to remember that full index tracking funds have to hold all the shares in all sectors of the market, at all times, even when a sector, like the technology or banking sectors we talked about earlier, have become expensive and are a risk of a market correction.

Mixed investment funds offer a simple and effective way of investing for people who don’t want to get too involved in choosing lots of funds. In a typical mixed investment fund, the cash deposit element will provide capital protection and, in normal times, a small interest return. The bond element will, if managed well, provide slightly higher returns than the cash element with some but not as much risk as your real assets in the stock market or property. And it’s these real assets – including the reinvested income - that should contribute the higher returns to your fund over time.

A well-managed mixed investment fund will capture some of the return on the stock market without exposing you to all the risk. These days, the investment industry categorizes their mixed investment funds to help you set a limit on your stock market exposure. You can choose whatever suits your tolerance and capacity for investment risk. Alternatively, you can choose a mixed investment fund from the ‘flexible’ investment category which, as its name implies, gives the fund manager full flexibility – to invest up to 100% of the fund in the stock market.

Please remember that the value of your investment and any income from it is not guaranteed, and can fall as well as rise. You may get back less than you invest.

 


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