The Financial Group
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THE EDUCATION SECTION Every month we look at a particular financial topic in a little more detail. This month we continue with part 2 of An Introduction to Investing in Funds. Part 1 can be found by clicking here & a downloadable pdf version of both parts 1 & 2 can be found here. ____________________________ What's the difference between active and passive investing? There are two main approaches to investing, both with advantages and disadvantages. o Passive   investing    -   this   means   investing   in   funds   that   are   purposefully   designed   to   track   the   performance   of an   investment   market,   so   there   is   very   little   human   input.   It's   like   driving   on   a   motorway   but   without   the option   of   changing   lanes   -   depending   on   how   clear   the   traffic   is,   you'll   move   quickly   or   slowly.   In   the   same way, passive funds go up or down with the market. There   are   many   passive   funds   available   &   through   them   you   can   track   most   investment   markets,   like property,   gold   or   an   index   like   the   FTSE   100,   which   represents   the   100   largest   Companies   traded   on   the London Stock Exchange. + Tend to be lower cost due to lack of expert input Returns will be broadly in line with the market Solid investment when markets are rising - Your investment will fall in value if markets go down Unlikely to outperform the market No flexibility to adapt to new opportunities o Active   investing    -   an   active   investment   approach   often   means   that   the   fund   manager   is   using   his   or   her expertise   to   seek   stronger   returns   than   the   investment   market.   So,   in   contrast   to   the   passive   car,   it   has   the freedom   to   change   lanes   and   find   a   different   route.   This   means   an   active   fund   has   the   potential   to   perform better than the market, or "outperform". However, it could also provide less growth than the market. An   active   manager   can   also   try   to   manage   risk,   by   keeping   an   eye   on   markets,   economies   and   global trends,   and   selling   assets   that   look   likely   to   lose   value.   The   success   of   this   depends   on   the   skill   of   the manager as well as careful research and analysis. + Flexibility to adapt to changing markets Potential to outperform the market, but this is not guaranteed May be able to switch into safer assets in poor economic conditions - Cost more, due to expert input Risk of underperforming the market Dependent on the skill of the manager What do I need to know about sectors? In   investment   terms,   a   sector   is   another   word   for   an   industrial   area   of   the   economy   in   which   companies   provide   a similar product or service. There are numerous sectors, though they can be broadly grouped in the following way: Defensive sectors (tend to be safer in a falling market) - o Consumer goods o Utilities o Health Care Growth sectors (tend to do well in rising markets) - o Technology o Financials o Energy o Materials o Industrials Should I invest in large or small companies? There   are   also   investment   sectors   that   group   companies   by   size.   For   example,   if   you   invest   in   the   FTSE   100, you're   investing   in   the   hundred   largest   companies   in   the   UK.   In   contrast,   the   FTSE   SmallCap   Index   covers   smaller UK companies that are traded on the stock market. Here are some of the differences: Small companies + Can be quick to respond to changes and new opportunities Can grow rapidly - May struggle to weather bad economic conditions Large companies + Big enough to survive during tough economic times Size means lower risk for investors Relatively stable profits mean some pay regular dividends to shareholders - Can be slow to respond to changes and new opportunities Should I invest at home or abroad? Many investors in the UK focus on British companies, bonds and sterling cash savings. Partly,   this   is   because   the   UK   provides   a   mature   economy   where   major   social,   economic   or   environmental   upheaval   is unlikely.   It's   also   a   well-regulated   market   with   numerous   laws   to   protect   you   from   illegal   or   unfair   practices.   However, you may want to look farther afield to benefit from diversification and greater opportunities. Why would I want to invest outside of the UK? You   can   diversify   outside   the   UK   by   investing   in   other   Western   economies,   such   as   the   USA,   Japan   and   Europe.   Like   the UK,   these   are   mature   markets   where   investment   practices   will   be   tightly   controlled.   Or,   you   could   invest   in   emerging economies,   like   China,   India   and   Russia,   which   are   experiencing   rapid   economic   growth   and   therefore   offer   exciting investment   potential,   although   greater   volatility.   However,   you   should   be   aware   that   many   overseas   investments operate   in   foreign   currencies,   and   therefore   changes   in   exchange   rates   can   affect   your   investments   positively   or negatively. Developed Markets + Mature economies, so relatively stable Strong Regulation Consumer Protection - May not offer the strongest growth Exchange rate risk outside of the UK Emerging Markets + Have the potential to become leading economies in the future Experiencing rapid growth - Immature economies, so may be less stable Poorer regulation Less consumer protection Exchange rate risk Where do I go from here? Hopefully,   we've   helped   you   on   the   first   steps   towards   making   the   most   out   of   investing   -   it's all about taking a balanced view of assets, regions, sectors, and of course risk and reward. So   why   not   take   the   next   step   &   contact   us   for   full   &   independent   advice   on   how   to   make   your money work harder for you! Finally, as always, do not hesitate to contact us  if you would like further details or information. ____________________________ Glossary of terms Active investing  -  investing where the returns depend on the skill of an expert Annual management charge  (AMC) - the yearly fee a fund manager charges investors for its expertise Asset allocation  - deciding how much to invest in different asset classes (bonds, equities, cash, etc) Benchmark       -   a   standard   against   which   the   performance   of   a   fund   is   measured,   e.g.   an   index   such   as   the   FTSE 100 Index Bond   -   a   loan   from   an   investor   to   a   company   or   government   in   return   for   regular   interest   payments,   over   a   pre- agreed period of time Correlation - the degree to which assets within a portfolio rise or fall in value at the same time Derivatives   -   a   financial   contract,   the   value   of   which   is   determined   by   the   price   of   something   else   (such   as   a share or financial index or an interest rate) Diversification - spreading investment across a number of different assets, regions or sectors Dividend - a payment made by a Company to its shareholders Equity - a share of ownership in a Company Growth - the increase in value of your investment Income - the payments you receive from your investment Initial charge  - a one-off fee investors pay to join a fund Passive investing  -  investing where the returns depend on tracking market movements Return - the amount you gain in terms of income and growth in your investment Risk - the potential for losing value in your investment Important Information   This   document   is   issued   by   The   Financial   Group,   which   is   authorised   and   regulated   by   the Financial   Conduct   Authority,   25   The   North   Colonnade,   Canary   Wharf,   London   E14   5HS   and   is   registered   in   England   and Wales, Company Registration No.5838482. This   document   contains   The   Financial   Group's   views   and   as   such   this   document   is   deemed   to   be   impartial   research.   We do   not   undertake   to   advise   you   as   to   any   change   in   our   views.   Opinions   expressed   are   as   at   the   date   of   issue   (May/June 2013),   but   may   be   subject   to   change.   The   material   contained   in   this   presentation   is   for   information   only   and   does   not constitute investment advice or recommendation to any reader of this material to buy or sell investments. Investment Risks Funds   that   invest   in   a   smaller   number   of   stocks   can   carry   more   risk   than   funds   spread   across   a larger number of companies. Investments   in   smaller   companies   can   be   less   liquid   than   investments   in   larger   companies   and   price   swings   may therefore be greater than in large company funds. Where   a   fund   holds   investments   denominated   in   currencies   other   than   sterling,   investors   should   note   that   exchange rates may cause the value of these investments, and the income from them, to rise and fall. Potential   investors   in   emerging   markets   should   be   aware   that   emerging   market   investments   can   involve   a   higher   degree of risk. Less   developed   markets   are   generally   less   well   regulated   than   the   UK   and   do   not   have   the   strict   standards   of accounting   and   transparency   present   in   developed   markets.   Some   of   these   markets   may   have   relatively   unstable governments,   economies   based   on   only   a   few   industries   and   securities   markets   that   trade   only   a   limited   number   of securities.   As   a   consequence,   both   the   value   of   investments   made   and   the   case   of   which   the   underlying   securities   can be bought and sold may be adversely effected. Some   funds   may   use   derivatives   for   investment   purposes.   These   instruments   can   be   more   volatile   than   investments   in equities or bonds.