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 want.
Also Read: Investing in the UK (in Your 20s and 30s)
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.
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:
There are two main types of funds: active funds and passive (index) funds.
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.
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).
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)
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:
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:
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.
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:
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.
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.
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:
To learn how to build a diversified portfolio, read: Investing in the UK (in Your 20s and 30s)
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.
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 investment fund providers in the UK:
Kickstart your investing with an award-winning ISA. Hargreaves Lansdown is a FTSE 100 company and the biggest investment platform in the UK. Its core mission is to build long-term client relationships by becoming a trusted partner and financial champion, ultimately helping you increase your financial security for the future.
If you choose to invest with Hargreaves Lansdown, you will gain access to over 2,500 funds, UK and overseas shares, ETFs, ETCs, investment trusts and more. With Hargreaves Lansdown, you can build your investment portfolio 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 portfolios by choosing from a range of ready-made options where the team of experts at Hargreaves Lansdown will take care of the day-to-day investment decisions for you. Advanced or more confident investors can choose from a wide range of funds, shares and other investments and build their portfolios themselves.
Hargreaves Lansdown does not charge a platform fee on its Fund and Share Account but charges 0.45% (capped at £45) a year on its ISA and 0.45% (capped at £200) a year on its SIPP. It offers most products, including a Fund and Share Account, Stocks and Shares ISA, Lifetime ISA, Junior ISA, and SIPP. These services are intended for investors who are happy making their own decisions.
Capital at risk. The fees quoted here are not exhaustive. Other charges apply.
AJ Bell is one of the UK’s largest online investment platforms, and its mission is to make investing as easy as possible for anyone. The platform offers thousands of investment options for the DIY investor, including shares, funds, bonds, investment trusts, ETFs, ETCs, and warrants.
There are multiple ways to get started with AJ Bell, depending on your risk tolerance and investing savviness. Beginner investors or those who prefer to choose a ready-made investment portfolio can get a little, or a lot, of help from AJ Bell’s specialists by selecting one of the investment ideas on offer. Investment ideas are diversified ready-made baskets of investments that you can select based on your personal preference and attitude to risk. There are eight total investment ideas, each built by a specialist team, and you can pick the right one for you depending on whether you are seeking to simply grow your money over time or receive an income whilst still growing your money. Expert investors can take advantage of the stock and fund screeners and complex instruments available on AJ Bell and build their portfolios themselves.
AJ Bell charges an annual platform fee ranging from 0.25% to 0% depending on the size of your portfolio. Dealing fees for buying and selling investments online are £1.50 for funds and £9.95 for shares (reducing to £4.95 if there were 10 or more online share deals in the previous month). AJ Bell’s products include a Share Dealing Account, Stocks and Shares ISA, Junior Stocks and Shares ISA, Lifetime ISA, SIPP and Junior SIPP.
Capital at risk.
Interactive Investor, recently acquired by wealth management giant abrdn, is the second-largest investment platform in the UK. Interactive Investor is well known for its fixed charges (as opposed to percentage-based fees like most other investment platforms), and it has been providing investment services and financial information since 1995.
If you choose to invest with Interactive Investor, you’ll gain access to over 40,000 investment options, including UK and overseas shares, funds, investment trusts, and ETFs. This is the second-widest choice of UK and international investments offered by an investment platform in the UK. You will also be able to access 17 global exchanges, including exchanges in North America, Europe and Asia Pacific. These include markets such as the FTSE 100, FTSE 250, FTSE All-Share, NASDAQ, Dow Jones and more. In addition to the exchanges above, Interactive Investor offers Japanese, Indian and Chinese shares in the form of ADRs (American Depositary Receipts).
Interactive Investor gives you a free trade every month, which you can use to buy or sell any investment. After that, trades usually cost £5.99. Interactive Investor also offers a free regular investing service that allows you to invest regularly without paying a trading fee each time. The site also has lots of expert ideas, research and insights, which can be helpful when choosing investments. Interactive Investor’s services include a Trading Account, Stocks and Shares ISA, SIPP and Junior ISA.
Capital at risk.
Bestinvest is a UK low-cost investment platform that allows you to trade or invest in over 3,000 instruments, including shares, funds, ETFs, and investment trusts. With Bestinvest, you can build an investment portfolio in two ways depending on your personal preferences, goals and attitude to risk.
Beginners or those who prefer a ready-made investment can build their portfolio by selecting one of Bestinvest’s ready-made investment portfolios. These off-the-shelf style portfolios are created and managed by the team at Bestinvest and come with a carefully selected and diversified collection of investments. Once you have picked one, you do not need to do anything else. There are three ranges to choose from: Expert, Smart and Direct, depending on whether you want to maximise the returns for the risk you take, focus on cost-efficiency or focus on individual investments. The team at Bestinvest will walk you through the process of selecting a ready-made portfolio. Advanced or more confident investors can choose from a wide range of funds, shares, ETFs and ITs and build their portfolios themselves.
To start building your portfolio with Bestinvest, you can deposit a lump sum or set up a monthly savings plan which allows you to automatically save or invest a set amount into your investment account every month. There are no set-up fees or fund dealing charges with Bestinvest. Bestinvest charges an annual platform fee ranging from 0.40% to 0% for DIY investing and 0.20% to 0% for ready-made investing. The dealing fee for buying and selling shares online is £4.95 per deal. Bestinvest’s suite of products includes a Stocks and Shares ISA, Junior Stocks and Shares ISA, General Investment Account, SIPP and Junior SIPP.
Capital at risk.
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 30th of June 2023, and trade commission-free up to a maximum commission amount of £500. Terms apply.
Please note: When you invest, your capital is at risk. 68.01% 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.
InvestEngine is a low-cost ETF investment platform that provides 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 leading global asset managers.
With InvestEngine, you can invest in two ways depending on your tolerance for risk and savviness as an investor: beginner investors or those who prefer 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 are a selection of ETFs based on your preferences and risk tolerance. Once you’ve selected one, you do not have to do anything else besides monitor the performance of your investments. Advanced or more confident investors can choose from 500+ commission-free ETFs and build their portfolios themselves. InvestEngine also offers fractional investing, which allows you to buy bits and pieces of an ETF with as little as £1. This enhances your ability to build a diversified portfolio even if you have a small amount of money to invest. 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 stands out amongst its competitors as one of the cheapest investment apps in the UK because it charges no platform or management fees on its DIY Portfolio and just 0.25% a year on its Managed Portfolio. You can also start investing with as little as £100. InvestEngine’s suite of products includes a Stocks and Shares ISA, Personal Account and Business Account.
Capital at risk.
Moneyfarm is a UK robo advisor that provides you with a personalised investment plan based on your risk preferences and goals. With Moneyfarm, you can invest in one of seven risk-rated portfolios recommended to you based on the result of an online assessment. Each portfolio comprises a mix of cost-efficient exchange-traded funds (ETFs) and other passive index trackers. Moneyfarm also offers ethical or ESG investment options for those who want to invest in line with their values.
Moneyfarm’s customers 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. To get started, you will be asked to complete a short survey so that Moneyfarm can better understand how you approach your finances before matching you to your investment portfolio and consultant.
You can start investing with Moneyfarm with as little as £500. Moneyfarm charges an annual management fee depending on how you choose to invest, ranging from 0.75% to 0.35% on the total value of your portfolio. An annual fund management fee of 0.20% (average) also applies to all portfolios. This is built into the cost of the ETF or tracker fund on any given day, so you will not see fund charges being deducted from your portfolio directly. Moneyfarm’s suite of products includes a Stocks and Shares ISA, Junior ISA, General Investment Account, and Personal Pension.
Capital at risk.
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.
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.
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.
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.
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.
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).
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.
Here are some of the best platforms to buy ETFs:
Every month, we’ll send you The Plug - a curation of the best personal finance content in the UK. We share real-life stories, how-to guides, top personal finance news, popular community questions, and tips to help you stay on top of your money.