Funds Centre |
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By Naomi Caine
So you want to invest in the stock market. How do you start? Most people don't want to buy shares in one or two companies because it's too risky. If the firm's fortunes take a downturn, so do their profits. A fund is the next best thing - and the most popular are unit trusts and open ended investment companies (OEICS). You pool your money with other investors so you can buy a broad spread of stocks. It's called diversification in the trade. There are essentially two types of fund. Trackers follow a stock market index, such as the FTSE All Share. They are run by computers, leaving no margin for human error. If the market goes up, so does your return. Of course, if it goes down, the value of your investment will also fall. Click here to visit Yahoo!'s Fund CentreOn trackA number of experts are fans of trackers and recommend the funds as a solid base for an investment portfolio. There is also evidence that trackers perform just as well as - if not better than - so-called active funds, which employ a manager. Shares have bounced back since March 2003 when the three-year bear market ended. But about three-quarters of UK fund managers have lagged the recovery, according to research by investment manager T Bailey. The average fund has turned £1,000 into £1,565 during the three years to the end of August 2006. However, the same money invested in the FTSE All Share over the same period would be worth about £1,600, less charges.In fact, nearly three quarters of the 278 funds in the All Companies sector failed to beat the FTSE All Share index in the period.Trackers are usually cheap, but charges vary - and you should pick the cheapest. You don't normally have to pay an initial charge and the annual fees can be less than 0.5%. But always look at the total expense ratio (TER) of a fund to get a truer picture of the cost. More than half of tracker funds have annual total expense ratios (TERs) of more than 1%, including the popular Virgin Index Tracking fund, according to research by Fidelity International. Fidelity cut the annual management charge on its tracker a year ago, so its TER is now 0.3%. There is no initial charge.Active schemes are more expensive - remember you are paying the salary of a City fund manager. You can typically expect to pay an upfront fee of 5%-5.5% and an annual charge of up to 1.5%.Click here to visit Yahoo!'s Fund Centre Supermarket sweep If you know the fund you want, you can cut the cost if you buy it through an online fund supermarket such as Fidelity Funds Network (www.fundsnetwork.co.uk) or Interactive Investor (www.iii.co.uk). You will normally pay a reduced initial charge of 1% or 1.25%. But you won't get any advice. There are more than 1,000 funds to choose from so you might want some expert guidance. It's best to seek help from an independent financial adviser (IFA) who must search the whole of the market and give you the option to pay a fee for the service. Find an IFA Most novice investors choose a UK fund because they feel more secure in a familiar market. If you already have a UK fund, it's probably best to look further afield, perhaps to Europe, America or even the Far East. You can get details of all the available funds through the Investment Management Association at www.investmentuk.org. The Financial Services Authority (FSA), the City regulator, also has comparison tables on its website at www.fsa.gov.uk/tables. If you are researching on the internet, try Yahoo's Fund centre, www.trustnet.co.uk and www.moneyfacts.co.uk Past performance Most people understandably look at past performance figures to give them some idea of a fund’s track record. But don’t rely solely on historical data. A fund that was top of the tables last year can easily crash to the bottom the next. You should take performance into account, but try to go back several years. Also find out about the aims of the fund and the style of the manager. Some funds, for example, invest in only a small number of stocks so their performance tends to be more volatile. Specialist funds that only invest in one type of stock, such as biotech or financial shares, also leave you potentially more vulnerable to losses. Experts often recommend that you follow a fund manager rather than a fund due to the high staff turnover in the investment industry. Bestinvest, an IFA, rates fund managers on its website (www bestinvest.co.uk). It also publishes a regular report into the performance of investment funds, called Spot the Dog. Click here to visit Yahoo!'s Fund Centre Risky business There is no guarantee that your funds will do well, even if you research the market meticulously. If you invest in shares, you are taking a risk. It’s best therefore to think of an equity fund as a long-term investment of at least five years, so that you have time to ride out any ups and downs in performance. You might prefer not to invest in an equity fund – and there are other choices. Bond funds are generally considered to be a bit more reliable because they invest in bonds, which pay a fixed amount of interest. Or there are money market funds that basically invest in deposit accounts. However, you might be better off in a savings account than a money market fund because the charges will eat into your returns. If you are prepared to take more of a risk, funds that invest in commodities such as gold are in vogue right now. But beware fad funds! If everyone is piling into a sector it usually means it’s too late to make any money. You might be just in time to lose some. It’s notoriously difficult to time the market – and best not to even try. And that’s why it often makes sense to drip feed your money into shares. Most investment companies will allow you to make monthly contributions to a fund, often from as little as £50. Tax tip You will pay tax on any profits – usually capital gains tax (CGT), which is due at your top rate of income tax. So, if you are a 40% taxpayer, you would pay CGT of 40%. The first £8,800 of gains is tax-free. You also pay less tax the longer you hold your investment, so you can cut the bill if you are clever. If you have not already used up your allowance, you can invest up to £7,000 a year into a tax-free Isa. Most unit trusts and OEICs can be put into an Isa – speak to the investment company or adviser. Uselful links:
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