Module 4 of 11
What are Funds?
Learn how funds work and why they're the most practical way for most people to invest.
Section 1 of 4
Funds: Investing Made Practical
A fund pools money from many investors to buy a diversified mix of investments.
Instead of buying shares in one company, a fund might own shares in hundreds of companies. Instead of you picking individual bonds, a fund manager does it for you.
Why this matters:
- Instant diversification: One fund = exposure to many investments
- Professional management: Experts make the day-to-day decisions
- Accessibility: You can invest with small amounts (even £25/month)
- Efficiency: Lower costs than buying everything individually
For most people, investing through funds is far more practical than picking individual shares or bonds.
Funds pool money to provide instant diversification and professional management.
Section 2 of 4
Types of Funds
By what they invest in:
- Equity funds: Invest in shares
- Bond funds: Invest in bonds
- Multi-asset funds: Mix of shares, bonds, and other assets
- Property funds: Invest in real estate
By how they're managed:
- Index (Passive) funds: Track a market index automatically, very low fees
- Active funds: Manager tries to beat the market, higher fees
By structure:
- Unit trusts / OEICs: Traditional UK fund structures
- ETFs (Exchange-Traded Funds): Trade like shares, often very low cost
- Investment trusts: Listed companies that invest in other companies
Don't worry about memorising all of this: the key is understanding that funds give you easy access to diverse investments.
Different fund types serve different purposes, but all provide diversification.
Section 3 of 4
Index Funds vs Active Funds
Index (Passive) Funds:
- Simply track a market index (like the FTSE 100 or S&P 500)
- No one tries to "beat the market"
- Very low fees (often 0.1-0.3% per year)
- Performance matches the market, minus small fees
Active Funds:
- A fund manager picks investments trying to beat the index
- Higher fees (often 0.7-1.5% per year)
- Some beat the market, many don't
- You're paying for the manager's expertise
The evidence: Over 15-year periods, roughly 85% of active funds fail to beat their benchmark index. The main reason? Higher fees drag down returns.
For most investors, low-cost index funds are the sensible choice, especially for core holdings.
Index funds often outperform active funds over time, mainly because of lower fees.
Section 4 of 4
Ethical and Sustainable Funds
Standard funds invest in whatever the index contains or what the manager thinks will perform best, including companies that might conflict with your values.
Ethical/Sustainable funds:
- Apply screens to exclude certain industries (weapons, tobacco, animal testing, etc.)
- May focus on companies with good ESG (Environmental, Social, Governance) practices
- Some actively seek positive impact investments
Important: "Ethical" means different things to different providers. Always check what's actually excluded.
For vegans: Generic ESG funds often don't exclude animal agriculture. You need funds with specific vegan screening, which is exactly what we provide at Vegan Invest.
Ethical funds let you invest according to your values, but check what's actually excluded.
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