Aviva Stocks & Shares ISA

Investing in funds: the basics

Thinking of investing? Here’s what you need to know about funds

Please enable your browser JavaScript to view the video

Click here for video transcript

If you're thinking about investing in funds but not sure where to start, don't worry you're not on your own.

Literally you're not on your own.

The good thing about funds is that you pool your money with other investors... and together you buy assets so it allows you to invest in more than one type of asset.

Assets can be:

  • shares – when you buy a piece of a company.
  • bonds – where companies or governments issue bonds to raise money, and you buy them and get interest in return.
  • cash – we all know good old cash, like money sitting in a bank or savings account
  • and property – where your money might be invested in commercial or residential property or both.

Even better the investment choice is done for you by a professional fund manager which takes the pressure off managing your own investments.

You have a choice of how they're managed, either actively or passively. Actively managed funds are looked after by a fund manager who takes a hands-on approach by using their knowledge from research and analysis to buy and sell your funds. You may have to pay more in charges.

Passively managed funds are set to track the performance of a stock market index, like the FTSE 100 – a list of the 100 biggest companies in the UK. There's less day to day management, so charges are usually lower.

Some investment providers offer an experts' shortlist of funds. It's like a top ten for you to choose from based on your needs. It can give you an idea of what might suit you but you'll still need to do a bit of research before making a decision.

Investing in a fund also allows you to spread your money around to reduce risk…investors call it diversification, we call it not keeping your eggs in one basket.

As there are so many stocks, it's unlikely that they will all do badly at the same time.

And you're less likely to lose all your money. Remember, investments can go down as well as up and you may get back less than you put in.

When you choose funds you need to think about your long term goals and the level of risk you're prepared to take. You might want your funds to pay you a regular income. If so income funds, which share the profits of the companies your funds are invested in, might suit you.

Or maybe your focus is growing your investment. Growth funds, where companies reinvest their own profits, aim to offer bigger returns in the longer term if you're happy to wait.

You can also invest with a clear conscience by choosing ethical investments.

So you see, funds are just another way of investing with as little, or as much support as you want.

You know the saying 'don't put all your eggs in one basket'? That's what you're trying to achieve when you're investing in funds. Funds allow you to invest in more than one asset at once.

You'll hear the word 'asset' a lot in investing. An asset is anything with monetary value, such as shares in a company, gold or property, for example. 

So rather than putting all your money into company shares or property, for example, you're pooling your money with other investors and putting it into a fund made up of shares and property (and lots of other assets as well).

It's not guaranteed: investments can go down as well as up and you could get back less than you invested. 

With funds, you're trying to achieve diversification with your investments – so, for example, if one company's shares go down, another company's might remain stable or even go up.

Lots of baskets for your very important eggs. 

What are funds made up of?

Each fund is made up of a few different assets. Here are the most common.

Shares

Buying a share is like buying a tiny piece of a company. If the value of the company goes up, so does your share. If it goes down – you guessed it – so does your share. 

Bonds (also known as gilts, if it's a UK Government Bond)

Think of a bond as an IOU. When a government or company wants to raise money, they might 'issue a bond' – effectively asking for a loan in the financial markets. Investors give them that loan, and are paid interest on a regualr basis, as well as the capital of the bond when it matures.

Money Markets/Cash

Investing in cash involves purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. Money market investments are generally low risk, but also low return. There is also the potential that inflation will reduce the purchasing power of cash.

Property

Property is good to include in a portfolio as it pays an income and there is capital growth from the value of the property and it behaves differently to other assets, so it can be a good way to achieve that all-important diversification. Your money might be invested in commercial or residential property (or both). Property can take longer to sell than other assets, so there may be a delay if you want to move your money out of a property fund. 

How are funds managed?

You've got two choices when it comes to how your funds are looked after – actively or passively. 

Actively managed funds

Actively managed funds are looked after by a fund manager who makes all the investment decisions. They'll monitor the market and decide what to invest in or when to buy and sell assets, aiming to outperform an investment benchmark or index. For example, a fund that invests in UK company shares will be aiming  to outperform the FTSE (Financial Times Stock Exchange) All-Share Index®.

Why choose an actively managed fund?

  • The human touch: the benefit of a fund manager's judgement and expertise
  • Flexibility with investments 
  • Potential for higher returns than the benchmark

Passively managed funds

In comparison, the fund manager of a passively managed fund or index fund aims to replicate the performance of an index, such as the FTSE (Financial Times Stock Exchange) All-Share Index®, rather than outperform it. The way a passive fund is managed won't change, no matter how it performs. 

Why choose a passively managed fund?

  • Usually lower charges
  • Track the performance of the benchmark

How do you buy funds?

To buy funds, you'll need to use an investment platform (it's like a supermarket, but instead of doing the weekly food shop, you're shopping for funds). Aviva's investment platform offers three ways to select the funds you want to invest in. 

Ready-made 

Ready-made plans are a good option if you're new to investing because they do the hard work for you. All you have to do is choose how risky you want to be with your investments and you'll be presented with a portfolio made up of funds to match that risk level. Aviva keeps it simple with four options: Lower, Lower to Medium, Medium to High and Higher.

Experts' shortlist

Some platforms offer a shortlist created by experts that you can pick your funds from. It's essentially a list of best-buys: funds that fund managers think will perform well.

Shortlists are a good option if you want more control over the individual funds you're investing in, but don't want to plough through everything available. It's worth noting that though they're picked by those in the know, there's no guarantee that funds in the experts' shortlist will perform any better than those in the full range.

At Aviva we monitor the funds in the experts' shortlist on an ongoing basis to ensure the funds continue to meet our selection criteria.

The full fund range

It's possible to build a bespoke portfolio by choosing from all the funds that Aviva has to offer. Sounds daunting? Usually an option for confident investors.  

Growth or income?

Funds don't try to be a jack of all trades. The focus will either be growing or generating an income for you. Which approach you choose depends on your financial goals and future plans. 

Ask yourself this: are you in a position to leave your money alone for a while in the hope that it grows as much as possible, or would you rather get some money back regularly? If it's the former, you should look at growth funds; if it's the latter, it might be better to focus on income funds.

Ethical investing – profit with purpose?

Ethical investments tend to focus on things like the evironment, projects that support social development, or businesses that support an inclusive work culture. Funds can also aim to be ethical by excluding so-called “sin stocks” – such as investments in tobacco and weapons.

Browse our investment accounts

You can explore our tax‐efficient ISAs and general investment products.

Investment articles

Take a look at our latest news and guides.