The Financial Group
We simplify all those essential financial decisions
THE EDUCATION SECTION Every month we look at a particular financial topic in a little more detail. This month we give you part 1 of An Introduction to Investing in Funds ____________________________ Like many things in life, investing is about balance Investments   can   offer   both   risk   and   reward,   and   generally,   the   bigger   the   risk,   the   greater   the   potential   reward. It's   down   to   each   investor   to   find   the   perfect   balance   for   them,   and   this   will   vary   depending   on   how   much   you have to invest, what stage of life you've reached and what you're trying to achieve. For    new    investors,    the    first    steps    can    seem    complicated.    There    are    thousands    of    different investment products available and often the  language is unfamiliar. That's   why   we've   written   this   article   -   to   give   you   a   clear   introduction   to   the   most   important investment   principles.   We'll   help   you   to   understand   essential   terms   (you'll   also   find   a   glossary   at the back) and hopefully give you a few ideas for making your money work a bit harder. So, what are the basics? Why should I invest? o Often,   people   find   life   too   busy   to   invest   properly.   Some   see   it   as   complicated,   time-consuming   and,   let's face it, a bit boring. o But your first step as an investor needn't be difficult and the financial benefits can make it worthwhile. o Many   of   us   already   hold   cash   savings.   Keeping   cash   in   a   bank   or   building   society   can   be   a   good   idea;   it's secure   and,   even   if   the   bank   goes   bust,   you're   unlikely   to   lose   your   money,   because   of   protection   in   place for   UK   savers.   However,   at   the   moment   inflation   is   deemed   to   be   high   and   interest   rates   are   at   record   lows, so   the   value   of   cash   savings   is   actually   falling   as   each   year   goes   by   -   meaning   that   your   money   cannot   buy you as much this year as it could last year. o That's   why   you   may   sometimes   want   to   consider   other   ways   to   make   your   money   grow,   especially   if   you don't need immediate access to it. o Investing   in   funds,   Unit   Trusts   &   OEICs   might   offer   a   good   way   to   grow   your   money   over   the   long   term, though there are some risks you should be aware of. What sort of investor am I? o Investing   means   taking   risks    -   you   could   get   back   less   money   than   you   invested.   So   it's   important   to understand   how   much   risk   you   want   to   take.   Typically,   the   younger   you   are,   the   more   risk   you   might   want to   take,   simply   because   you   have   longer   to   recover   from   any   periods   when   your   investments   may   have fallen in value. A retiree relying on pension income might be less willing to take risk. o We   have   developed   a   Risk   Questionnaire   to   help   you   understand   your   own   Attitude   to   Risk .   By clicking   the   link   you   will   be   taken   to   our   Risk   Questionnaire,   which   is   a   series   of   18   questions. Once   completed,   simply   click   the   Submit   button   &   we   will   get   back   to   you   within   72   hours   with   a complimentary   4   page   report   that   details   your   Attitude   to   Risk   &   the   types   of   investments   that may be suitable for you. o Click here to go to the Risk Questionnaire. Here are a few questions to consider: o What's my objective? do I need income to supplement a pension save for my children's future or something else? o What sort of return am I looking for? o Is it more important to take an income from the money or grow my money? o How long do I want to invest for? o When will I need my money back? What are funds? A   fund   is   a   "collective   investment",   such   as      a   Unit   Trust,   OEIC   (Open   Ended   Investment   Company)   or   Investment Trust. An   expert   fund   manager   will   use   your   money,   alongside   that   of   other   people,   to   buy   a   number   of   different   assets on   your   behalf   (we   explain   assets   in   the   next   section).   The   basket   of   investments   chosen   by   the   fund   manager   is known as a portfolio, or fund. Funds might aim to pay investors a regular income or grow the money. Some do both. Here are the differences: o Growth   -   this   means   the   fund   aims   to   increase   the   value   of   your   original   investment   by   selecting   assets that   the   fund   manager   believes   will   increase   in   value.   It   might   take   more   risk   and   aim   to   grow   quickly,   or take   a   more   cautious   approach   for   steady   growth.   The   latter   approach   might   involve,   say,   investing   in   the stocks of large, well-established companies. o Income   -   instead   of   only   selecting   assets   that   the   manager   thinks   will   increase   in   value,   income   funds   aim to   make   regular   payments   to   their   investors   by   selecting   assets   that   pay   out   cash.   This   can   then   be   used immediately,   to   supplement   pension   earnings   for   example.   Some   funds   allow   you   to   reinvest   any   income you   receive.   This   means   that,   as   each   year   goes   by,   you   could   benefit   from   investment   rewards   on   the original   amount   -   because   assets   selected   for   income   payments   may   still   grow   in   value   -   and   also   on   the reinvested   amount.   It's   like   growing   a   sunflower   and   using   the   seeds   to   plant   more   -   the   longer   you   do   it, the bigger the crop. This can have a dramatic effect on your investment value over time. Why do people invest in funds? You   will   find   a   vast   range   of   funds   are   available,   investing   in   anything   from   UK   Property   to   small   companies   in South America.  Funds are popular investments for a number of reasons - o Expertise -   you   do   not   need   to   have   particular   knowledge   or   investment   skill,   because   someone   else takes care of your investment for you. o Managing risk -   some   funds   spread   your   investment   across   a   wide   range   of   different   assets,   regions and   sectors.      This   helps   to   reduce   the   risk   of   financial   loss   if   any   single   area   performs   poorly.      There   are   all kinds   of   individual   risks   that   a   fund   manager   seeks   to   guard   against,   such   as   foreign   currency   movements, the impact of political instability or individual companies going bust. o Low-cost  - pooling   your   money   with   other   people's   means   you   get   a   more   varied   portfolio   of   investments than   most   people   could   afford   alone.      This   is   because   the   cost   of   buying   and   selling   of   different   assets   in   a varied portfolio could be prohibitive if you try to do it on your own. o Flexible - most funds allow you to invest a lump sum, or smaller, regular payments. What are asset classes? An asset class is simply a category of investment. Here are the main ones: o Cash   -   relatively   secure   and   pays   regular   interest.   It's   a   low   risk   asset   but   offers   low   potential   returns   and the total amount may be falling in real terms all the time, as living costs rise. o Bonds   -   basically   an   IOU,   where   the   investor   loans   money   to   a   company   or   government   in   return   for   an agreed   rate   of   interest   over   an   agreed   period   of   time.   At   the   end   the   investors   get   their   original   sum   back. This is considered a lower risk investment than equities, though higher risk than cash. o Equities   -   shares   in   a   company,   meaning   that   you   own   part   of   the   company.   Tends   to   be   a   higher   risk   and higher return asset than either cash or bonds. There   are   many   other   asset   classes   available,   including   property,   commodities   and   specialist   investments,   such   as hedge   funds.   However,   these   can   be   complex   and   are   therefore   thought   to   be   less   suitable   for   inexperienced investors. Why all the fuss about diversification? Diversification   means   making   sure   your   investment   portfolio   is   varied,   with   a   good   mix   of   assets,   regions,   fund managers and sectors. This   goes   beyond   asset   allocation,   aiming   for   diversity   within   each   asset   class,   as   well   as   across   your   entire portfolio. There are two main benefits of a diverse portfolio. o Minimising   risk    -   there's   a   concept   in   investing   called   "correlation".   Simply   put,   it   means   whether   different assets   in   your   portfolio   gain   or   lose   value   at   the   same   time.   Imagine   you   have   a   cupboard   full   of   shoes.   If they   were   all   wellington   boots,   you   would   be   well-equipped   for   wintry   conditions,   but   less   happy   on   the beach   in   summer.   It's   similar   with   investing,   as   a   poorly   diversified   portfolio   means   when   one   of   your   assets is doing badly, so is your entire portfolio. Diversification   helps   to   minimise   this   danger   by   reducing   correlation   between   your   assets   -   so   if   one   of   your assets   has   disappointing   performance,   it's   possible   that   your   other   assets   could   balance   this   with   good performance. o Maximising   opportunity    -   the   other   benefit   of   diversification   relates   to   growth.   It's   difficult   to   predict   which assets,   regions   or   sectors   will   perform   well,   so   it's   wise   to   spread   your   investments   widely   so   you   don't miss   out.   It's   also   true   that   some   people   might   not   want   a   diverse   portfolio,   deciding   to   concentrate   on   a narrow   area   instead.   However,   this   is   a   higher   risk   approach   and   requires   considerable   experience   and expertise. In part 2 of this article next month we will discuss - What's the difference between active and passive investing? What do I need to know about sectors? Should I invest in large or small companies? Should I invest at home or abroad? Why would I want to invest outside of the UK? Finally, as always, do not hesitate to contact us  if you would like further details or information.