What is a fund and how do they work?

A fund is a collective investment, which is manged by a fund manager. They’ll pool your money with other investors and use it to invest in a range of assets like shares, bonds and more. The fund manager is responsible for the mix of investments, deciding what to buy and sell using the total amount of money.

This allows investors to diversify their investments without needing to buy each one individually. Think of it as a basket holding a variety of fruits – instead of buying apples, oranges and bananas separately, you get a mix, all in one go.

Types of funds

There are two main types of funds: active funds and tracker funds.

Active funds

A fund manager will regularly monitor the investment mix and decide which assets to buy and sell to meet the fund objectives. 

Tracker funds

The fund manager aims to follow the performance of a specific index by selecting the same investments. This means they’ll simply track that index. They’re also known as passive or index funds. They don't need active management, which usually means lower fees. 

What is an index?

An index is a measurement of the performance of a group of assets.

For example the FTSE 100 index tracks the performance of the 100 largest companies listed on the London Stock Exchange, while the S&P 500 index tracks the performance of 500 large companies listed on stock exchanges in the United States.

Why invest in a fund?

There are several key benefits to investing in a fund:

Convenience

Funds simplify the investment process, making it easier for you to invest without needing to manage large numbers of individual holdings. The fund manager does all the work – so you don’t have to.

Diversification

Funds are often made up of a large range of investments. This spreads the risk and makes your investment less prone to sudden market changes.

Professional management

The fund manager makes investment decisions to deliver the fund objectives.

Cost-effective

Funds can offer a lower-cost way to invest in a range of assets – especially if selecting a tracker fund.

Variety

There is a huge variety in the funds you can invest in. This means you can pick to invest in funds that align with your financial goals, level of risk and your personal values and considerations.

How to invest in funds

Whether you're looking to optimise your portfolio or explore new investment opportunities, funds can offer a versatile and effective way to achieve your goals.

Funds centre

You can choose from more than 2,000 funds in our fund centre.

More about funds centre

Select List

Too much choice? Take a look at our Select List, a shortlist of funds selected by the experts at FE fundinfo.

More about Select List

The Select List is not intended to be a recommendation or advice. The value of investments and income from them can fall as well as rise. If you’re unsure about investing, seek financial advice. This advice may be charged for.

You can buy funds in your Share Dealing Account or ISA and pay zero commission if you use our Regular Investment service. 

Please remember that the value of investments and the income from them can fall as well as rise, and you may get back less than you invest. If you’re not sure about investing, seek financial advice. There will normally be a charge for that advice.

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