Always remember that investments can go down as well as up in value, so you could get back less than you put in. A rule of thumb is to hang on to your investments for at least five years to give them the best chance of providing the returns you are hoping for.

How to Invest in Funds and ETFs in the UK

Updated On: Jun 20, 2022
How to Invest in Funds and ETFs in the UK

Contents:

Also Read: Investing in the UK (in your 20s and 30s)

What is a Fund?

A fund pools money from you and other investors, and a specialist fund manager invests it on your behalf in assets such as shares, bonds, properties and commodities.

Instead of buying these individual assets yourself, you can choose to invest in a fund. Funds save you the trouble of buying shares in multiple companies or worrying about building a diversified portfolio. They are also safer and cheaper than buying individual stocks since you share the risks and costs with other investors. Most people, including experienced investors, use funds when investing.

Types of Investments in a Fund

There are several types of investments that make up a fund, and they range from stocks and shares to bonds, commodities and even commercial real estate.

When you buy a unit of a fund, you are investing in a variety of these types of investments at a relatively low price. Such investments include:

  1. Stocks and Shares: A share is a unit of ownership of a public company. If, for example, you invest in Apple Inc. shares, you will become a part-owner of Apple. If it performs well, you will benefit from its success. If it does not, you may lose some money. Shares are also called equities or stocks.

  1. Corporate Bonds: When you invest in a corporate bond, you are lending money to a company in return for interest.

  1. Government Bonds: When you invest in a government bond or gilt, you are lending money to a government in return for interest.

  1. Commodities: When you invest in commodities, you are investing in precious metals (gold, silver), oil, agriculture, etc.
  2. Properties: When you invest in property, as the name suggests, you are investing in real estate.

Types of Funds

There are two main types of funds: active funds and passive (index) funds.

What is an active fund?

An active fund is a fund actively managed by a team of fund managers. These fund managers employ various strategies to pick shares, bonds, and other assets they think will do well with the goal of outperforming the stock market and other competing funds. But, there are no guarantees. While some fund managers certainly beat the stock market and reel in huge chunks of returns for investors, others do not.

Active funds are usually more expensive than passive funds because you pay extra for the active service.

Most funds in the market are active. Investment providers always tell you whether funds are active or passive.

What is a passive (index) fund?

A passive fund (also known as an index or tracker fund) is different from an active fund in that rather than attempt to beat the market, the fund managers track it. This simply means that fund managers often buy shares in every company listed on an index with the goal of performing exactly as the index does instead of picking individual shares or bonds they think will do well, as is the case with active funds.

An index is simply a list of shares or bonds in any given market. You may have heard of the FTSE 100 index. It is an index of the 100 largest companies on the UK stock market. A passive fund tracking the FTSE 100 index, for example, will buy shares in all the companies on that index. So if you purchase a FTSE 100 index fund, you will be investing in the 100 companies with the highest market capitalisation on the London Stock Exchange. 

Similarly, if you buy a FTSE All Share index fund, you will be investing in all the companies listed on the London Stock Exchange that pass the screening for size and liquidity.

Most people invest a portion of their long-term or retirement savings into passive funds because they are less volatile than their active counterparts. Passive funds tend to deliver healthy returns over a long-term period, but they never outperform or underperform the market as active funds do.

Examples of passive funds include index funds and exchange-traded funds (ETFs).

What is an ETF?

An exchange-traded fund or ETF is an index fund that can be traded on the stock exchange like a share. ETFs and index funds are pretty much the same thing, with the main differences being that ETFs are traded on the stock market (this means you can buy or sell them at any time during the day, just like shares), and sometimes, they have extra fees.

For examples of popular index funds and ETFs, read: Investing in the UK (in your 20s and 30s)

How to Invest in Funds

To invest in funds, you need to choose one or more investment themes (e.g. stocks only, stocks and bonds, UK large-cap companies, government bonds only, commercial real estate, US mid-cap, technology companies, etc.); then decide whether you want to receive or reinvest dividends; next, choose a tax wrapper; and finally, find an investment platform. 

Here’s what we mean:

1. Choose one or more investment themes

Funds usually have a specific theme or sector around which all investments are structured. Themes tell you which area of the market a fund is invested in, allowing you to make a preliminary judgement on the fund’s risk level and to invest in alignment with your interests, values, and objectives. For instance, if your ethical values are a factor when choosing your investments, you might want to invest in funds with a socially responsible or green theme. Fund themes could include but are not limited to:

  • Company size: large-cap, mid-cap, small-cap, unicorns, etc.
  • Asset type: shares, corporate bonds, government bonds, commodities, etc.
  • Industry: real estate, technology, utility, etc. 
  • Geography: America, UK, Europe, Emerging Markets, Africa, etc.
  • Ethics: companies with high environmental, social and governance (ESG) scores

2. Decide whether you want to receive or reinvest dividends

When you invest in funds, you might receive regular income from your investments. Many funds allow you to collect this income or reinvest it in your portfolio automatically.

If you choose “income”, you will receive regular payments in your bank account. This income comes from the dividends of the companies the fund invests in.

If you choose “accumulation”, your income will be automatically reinvested, which will increase the total value of your investments and, by extension, the price of each unit of the fund. Most people investing to grow their money in the long term usually buy funds of the accumulation class.

3. Choose a tax wrapper

A tax wrapper reduces the amount of taxes you pay on your investments. Examples of tax wrappers in the UK are Individual Savings Accounts (ISAs) and pensions.

Here is a detailed breakdown:

  1. Stocks and Shares ISA: A Stocks and Shares ISA lets you invest your tax-free ISA allowance in qualifying investments such as shares, corporate bonds, government bonds (gilts) and funds. This tax year, your ISA allowance is £20,000. This means you can invest up to £20,000 into a Stocks and Shares ISA without having to pay tax on the gains from your investments. A Stocks and Shares ISA is also called an Investment ISA.

  1. Lifetime ISA: A Lifetime ISA is open to adults aged 18 and over but under 40 and lets you save or invest up to £4,000 a year towards your first home or retirement. The government will add a 25% bonus to your savings every year up to a maximum of £1,000 per year.
  2. Pensions: Tax relief is available from the government when you pay into a pension, but you can’t access the money until you turn 55 (increases to 57 in 2028) when you can take 25% as a tax-free lump sum.

It is also worth mentioning that if you do not want to use a tax wrapper, perhaps because you have already used up your ISA allowance for the tax year, you can choose to invest in a general investment account (GIA).

With the GIA, you are allowed to make up to £12,300 of gains tax-free. Additionally, the first £2,000 you receive in dividends is tax-free.

4. Find an investment platform

You can buy funds from banks, building societies, stockbrokers, fund supermarkets, robo advisors, trading apps and other financial institutions. The specific provider you choose will depend on your objectives, investing savviness and personal circumstances. Scroll down to discover some of the best fund providers in the UK.

How to Choose Funds

Once you are ready to invest, you’ll have to pick a fund provider and choose funds from the selection offered by your provider. You should know your objectives and risk appetite and have a rough idea of the kinds of investments you want in your portfolio. It would help if you also plan to invest for at least five years and ensure that you are not heavily indebted or cash-strapped before you begin.

Here's how to choose funds:

  1. Know your objectives: Why are you investing? Is it for retirement, buying a home or some other long term goal? For example, most people investing for retirement will have their eye on passive funds.

  1. Consider your risk appetite: The higher the return you want, the higher the risk you’ll have to be willing to accept. It’s usually wise to take on more risk when you are young with many years ahead of you to ride out any dips in the market.

  1. Keep an eye on costs: ‍There are several charges associated with investing in funds. These charges are usually displayed as a flat fee or a percentage typically below 1%. While that may not look like much on the surface, costs tend to add up over time. As a general tip, percentage-based charging tends to work out cheaper for people who do not have a lot of money to invest. In contrast, flat fees are usually cheaper for people who have a lot of money to invest.

  1. Build a diversified portfolio: Using the fund themes above, you can build a diversified portfolio of funds based on your interests and objectives. We emphasise diversity because top-performing funds vary from year to year, so investing in different asset types (e.g. shares, bonds) and different geographies (e.g. America, Europe, Emerging Markets), for example, is usually a good idea. This way, you are never overexposed to just one market. It is also important not to be too diversified as an over-diversified portfolio can only ever be average.

To learn how to build a diversified portfolio, read: Investing in the UK (in your 20s and 30s)

Fund Charges

We’ve outlined some typical fund fees below. You can always find the full details of a fund’s charges in its Key Investor Information Document (KIID).

Quick Tip: Fixed fees tend to work out cheaper for people investing high amounts, whereas percentage-based fees tend to be less expensive for those with little to invest.

  1. Annual Platform Fee: This is charged by the investment provider for providing a platform for you to invest in.

  1. Annual Fund Management Fee: Also known as Ongoing Charge Figures (OCF) or Total Expense Ratio (TER). This is the fee paid directly to the fund manager responsible for managing your funds. When you invest in funds, you typically select a few funds to invest in. If you selected three different funds, for example, you would have to pay a fund management fee on each fund.

  1. ‍Market Spread: Also known as transaction cost. This is the difference between the buy and sell price of an asset.

  2. Annual Investment Cost: Some providers display this cost as the annual fund management fee plus the market spread.

  3. Trading Fee: Also known as dealing fee. This is the fee for buying and selling funds, shares or other types of investments on the platform. It usually ranges from £0 to £25.‍‍

  4. Transfer-out Fee: Also known as an exit fee. It is the fee you pay for moving your investments from one fund provider to another. Not all platforms charge an exit fee, but those that do typically charge per fund or holding.
  5. Advice Fee: This is only paid if you opt-in for financial advice.

Best Fund Providers in the UK

We’ve compiled a list of some of the best fund providers in the UK. These are websites, apps, trading platforms and investment providers that allow you to buy, sell and gift UK and overseas funds, stocks and other trading products.

Capital at risk. Other charges apply. ISA rules apply.

Compare some of the best fund providers in the UK:


InvestEngine - Low cost; 500+ Commission-free ETFs

InvestEngine Logo
Account Type
DIY & Ready-made
ETF Cost
0.15% - 0.25%
Annual Platform Fee
0% - 0.25%
Minimum ISA Deposit
£100

InvestEngine is a UK low-cost investment platform providing a choice of managed portfolios tailored to you and commission-free DIY investing to help you build long-term wealth. Users can invest in over 500 exchange-traded funds (ETFs) from iShares, Vanguard and other leading brands. With InvestEngine, you can invest in two ways depending on your investing savviness: Beginner investors or those who prefer to choose a ready-made investment portfolio can select from one of the Managed Portfolios on offer where the team of experts at InvestEngine will take care of the day-to-day investment decisions for you. These portfolios attract a platform fee of 0.25% per year. Advanced or more confident investors can choose from 500+ commission-free ETFs and build their portfolios themselves. With the DIY Portfolio, there are no platform fees. All InvestEngine portfolios are free of setup fees, dealing fees, ISA fees or withdrawal fees. InvestEngine allows you to invest via a Stocks and Shares ISA, Personal Account or Business Account.

Promo: £25 welcome bonus for new customers who invest at least £100. Terms apply.

Capital at risk.

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Interactive Investor - One free trade per month; 40,000+ investments

Interactive Investor
Account Type
DIY & Ready-made
Dealing Fee
£7.99 - £3.99
Annual Platform Fee
£120 - £240
Minimum ISA Deposit
£25

Interactive Investor has more than 40,000 investments to choose from, including UK and overseas shares, funds, investment trusts, and ETFs. You get a free trade every month, which you can use to buy or sell any investment. It is free to top up your ISA each month, and there are no trading fees with its regular investing service. It also has several ready-made funds and expert ideas to make it easy to choose investments. Interactive Investor also offers a Trading Account, SIPP, and Junior ISA.

Capital at risk.

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Fineco Bank - Low cost; 20,000+ investment options

FinecoBank Logo
Account Type
DIY & Ready-made
Dealing Fee
£0 (Funds)
£2.95 (Shares)
Annual Platform Fee
0.25% (Funds)
0.25% (Shares - max £2.95/month)
Minimum ISA Deposit
£25

FinecoBank is one of Europe's largest banks, with 20 years of leadership history in brokerage and over 30 million orders processed every year. Its core mission is to make online trading simple by providing direct access to the markets in just one click. With Fineco, you can access 26 global markets and trade over 20,000 financial instruments worldwide on a single account, including UK and overseas shares, ETFs, funds, bonds, and CFDs. Users can also invest and trade directly in GBP, EUR, USD, Swiss Franc and 20+ currencies. FinecoBank's products include a Trading Account and Stocks and Shares ISA.

Promo: Apply with the link below by the 31st of December 2022, and trade commission-free up to a maximum commission amount of £500. Terms apply.

Please note: When you invest, your capital is at risk. 71.97% of retail investors lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and can afford to take the high risk of losing your money.

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Hargreaves Lansdown - Lots of investment options, research and tips

Hargreaves Lansdown
Account Type
DIY & Ready-made
Dealing Fee (Online)
£0 (Funds)
£11.95 - £5.95 (Shares)
Annual Platform Fee
0.45% - 0% (Funds)
0.45% (Shares - max £45/year)
Minimum ISA Deposit
£100 lump sum or £25 per month

Kickstart your investing with an award-winning ISA. Hargreaves Lansdown has thousands of investments to choose from, including UK and overseas shares, funds, investment trusts, and ETFs. Choose your own investments with expert research and ideas to help you, or simply pick a ready-made portfolio. Manage via website, app or phone. Hargreaves Lansdown also offers a Lifetime ISA, Junior ISA, Fund and Share Account, and SIPP. These services are intended for investors happy at making their own decisions.

Capital at risk. Other charges apply.

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AJ Bell Youinvest - Mid-price range; Lots of investment options

AJ Bell Youinvest
Account Type
DIY & Ready-made
Dealing Fee (Online)
£1.50 (Funds)
£9.95 - £4.95 (Shares)
Annual Platform Fee
0.25% - 0% (Funds)
0.25% (Shares - max £3.50/month)
Minimum ISA Deposit
£500 lump sum
or £25 per month

AJ Bell Youinvest has thousands of investments to choose from, including shares, funds, investment trusts and ETFs. And you can manage them both online or through the mobile app. If you need help choosing, it has four ready-made portfolios and other investment ideas. AJ Bell Youinvest offers a Stocks and Shares ISA, Lifetime ISA, Junior ISA, Dealing Account and SIPP.

Capital at risk.

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Bestinvest - Low cost; Lots of investment options and research

Bestinvest logo
Account Type
DIY & Ready-made
Dealing Fee
£0 (Funds)
£4.95 (Shares)
Annual Platform Fee
0.4% - 0% (DIY)
0.2% - 0% (Ready-made)
Minimum ISA Deposit
£0

Bestinvest is a UK investment platform offering about 2,500 funds, UK shares, investment trusts and ETFs. With Bestinvest, you can invest in one of two ways depending on your investing savviness: Beginner investors or those who prefer to choose a ready-made investment portfolio can build their investment pot by selecting one of Bestinvest’s ready-made investments. These investments are fully diversified and created and managed by the team at Bestinvest. Once you’ve picked one, you don’t need to do anything else. Advanced or more confident investors can choose from a wide range of funds, shares, ETFs and ITs and build their investment portfolios themselves. Bestinvest also has an investment search tool that makes it easy to browse and filter all of the investments, and you can use their free guides and articles if you need any inspiration. They are quite popular for their Spot the Dog guide which shows a list of poorly performing funds you probably want to avoid. Bestinvest’s products include a Stocks and Shares ISA, General Investment Account and SIPP.

Capital at risk.

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Moneyfarm - Mid-price range; Financial advice; Ethical investments

Moneyfarm Logo
Account Type
Ready-made
Annual Fund Management Fee 0.20%
Annual Platform Fee
0.75% - 0.35%
Minimum ISA Deposit
£500

Moneyfarm is a UK robo advisor that provides you with a personalised investment plan based on your risk preferences. Investors can choose from seven globally diversified risk-rated portfolios, including ethical investments, if you prefer to invest in line with your values. The team at Moneyfarm actively manages your investments, but each investment portfolio is made up of exchange-traded funds (ETFs) and other passive trackers. You also benefit from free and personalised digital financial advice from Moneyfarm's investment consultants, and you can chat, phone, email, or meet your consultant in person. Moneyfarm's products include a Stocks and Shares ISA, General Investment Account, and Personal Pension.

Capital at risk.

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Frequently Asked Questions

1. Can I move funds from one platform to another?

Yes, you can move funds from one platform to another, provided the platform you are switching to sells the same funds as the old platform. If it does not, you will have to sell your funds on the old platform and start afresh with different funds on the new platform.

2. What are the tax benefits of investing?

You enjoy tax benefits when you hold your investments in an ISA or pension. You can invest up to £20,000 into a Stocks & Shares ISA tax-free this tax year. If you choose to invest in a general investment account (non-ISA), you are allowed to make up to £12,300 in gains tax-free. Additionally, the first £2,000 you receive in dividends is tax-free. Scroll up to learn more about tax wrappers.

3. Are funds worth investing in?

Funds can be a great way to build a diversified portfolio without investing too much of your own time or energy into researching multiple stocks, bonds or other assets. Buying one unit of a fund can expose you to more stocks and bonds than if you were to directly invest in the market yourself. Funds allow you to gain access to a range of markets around the world and a wide variety of industries and specialist asset classes. You must still keep in mind that investing in funds will usually always involve taking on a certain degree of risk, and this should be considered carefully before investing.

4. What happens when you invest in a fund?

When you invest in a fund, the fund manager will decide the exact choice of investment. Depending on the type of fund you choose, your investment will either be actively managed - where buying and selling are done more frequently, with the aim to deliver a return better than the stock market, or passively managed - where the fund replicates the market and aims to grow as the market does. In your chosen fund, you’ll buy ‘units’ which can increase or decrease depending on how well the fund performs. If you multiply the cost of each unit in your fund by the total number of units, you’ll know the value of your investment before fees.


5. Are funds better than shares?

Funds are a great investment option for those who feel they do not have the time, expertise or commitment to manage their own portfolio of investments. When you purchase a fund, you are effectively delegating responsibility for managing your money to a fund manager. This fund manager invests your capital (pooled with that of other investors) into thousands of assets across multiple industries and geographies. You will still have the freedom to choose the asset class and theme.

6. Do all funds pay dividends?

No, not all funds pay dividends. Funds have two classes based on whether or not they pay dividends. You can choose to buy funds in either “Income” or “Accumulation” classes, depending on whether you want to receive or reinvest your dividend. Income means you will receive regular dividends, while Accumulation means your dividends will automatically be reinvested (increasing the size of your portfolio).


7. Can you lose money in a fund?

Funds are generally considered to pose fewer risks than individual shares since they include a variety of assets and are overseen by paid fund managers who work on behalf of the investors. But, it’s still important to keep in mind that there are no guarantees when investing, and some funds may even pose higher risks depending on the theme or combination of the fund itself. For example, if the fund was focused entirely on the technology sector, and that particular sector began performing poorly, the lack of diversification would result in that fund underperforming.

8. Which platform is best for ETFs?

Here are some of the best platforms to buy ETFs:

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