Choosing a range of stocks, shares and other financial instruments to invest in can be interesting and rewarding, but what if you don’t have the time, money or the inclination to trawl the financial markets looking for the perfect addition to your portfolio? A pooled or collective investment may provide the perfect solution. There are plenty of benefits to investing in a collective fund, not least the fact that you have a full-time professional fund manager working hard to make you a return on your investment.

There are thousands of pooled investment funds to choose from, spread across many sectors and regions. This may seem daunting when you’re looking to invest in a collective fund for the first time, but a good starting point is to decide what you want from your investment: an income, capital growth or a mixture of the two. Then it’s simply a matter of doing your research to discover the sectors you think will deliver going forward and the fund managers that will produce the best returns. What Investment prints performance tables for both unit trusts and investment trusts every month. You can also search online for a specific unit trust or investment trust and view tables of top ten performers.

The aim of this guide is to help you learn the basics and once you’ve finished, you can read our guides to investment trusts and unit trusts.

Spreading risk

Pooled or collective investments allow for risk diversification by providing investors with access to a portfolio of holdings via one or more unit or share purchases. There are thousands of pooled investment funds available, focusing on hundreds of different sectors and countries.

Specialist funds are designed to concentrate on a very specific area, sector or type of investment. At the other end of the scale, you can choose a generalist fund with a global mandate that is able to invest in any type of company in any sector.

Obviously, a very general fund will be able to provide a high level of diversification by investing across a number of regions and countries, so that volatility in one area can be balanced out by other holdings. But even specialist funds provide some diversification. For example, if you wanted to invest in UK smaller companies, it might be impractical (in terms of costs and research time) to invest in more than a few different companies. A fund manager, on the other hand, can bulk buy shares and spread the investment further. He or she is also likely to have an in-depth knowledge of the sector and sometimes even a team of researchers at their disposal to keep an eye on relevant sectors for new opportunities and potential problems.

In addition, fund managers can gain access to markets and instruments that individual investors don’t have the knowledge, capital or perhaps even legal right to invest in, for example, hedge funds, companies listed in emerging markets, private equity situations or complex derivatives.  

Costs

A fund manager can make use of economies of scale to make your money go further. Think about it: with all the fees and charges associated with trading, how far do you think your monthly investment allowance would actually stretch if you were left to your own devices to build up a portfolio of individual stocks and shares? With a pooled investment you can invest a monthly amount (often from as little as £25 or £50) or a lump sum in order to build up a nice nest egg for retirement, school fees, a deposit on a house, or simply for a rainy day.

This argument also extends to the administrative side of investing. Trading involves buying and selling shares, collecting dividends and income, paying stamp duty and so on – all of which result in paperwork and cost time and money for the investor. With a pooled fund, however, the fund manager takes care of all the paperwork and collects your dividends for you. In addition, you don’t have to worry about navigating foreign stock markets, allowing for returns of foreign currencies or dealing with brokers – the fund manager takes care of that too.   

Lump sum or monthly payments?

If you choose to pay a monthly amount into a pooled investment, you could benefit from what is called pound-cost averaging. This basically allows you to smooth out any market volatility. Not everyone agrees with this theory but it’s worth taking on board when deciding where and how to invest your money.

It basically works as follows:

Kate sets up a direct debit from her current account to invest £500 in a specific collective fund on the first of every month. Although some months the price of a unit or share in the fund will be higher, meaning she will receive fewer shares or units for her £500, in other months the price will be lower and so her £500 investment will go further.

According to the theory of pound-cost averaging, after a few years the average price Kate has paid during the time she has been investing in this fund will be lower than the average share price for the period. This is because Kate was investing an amount of money over a regular period, rather than buying a certain number of shares or units each month. Therefore, she will have bought more shares at the lower price than at the higher price, or so the theory goes.

Pound-cost averaging is billed as a way to avoid risk by smoothing out volatility, but some critics argue that if you have a lump sum you should invest it all at once, rather than making piecemeal investments that will mean part of your money is out of the market for a period of time. But for those with a regular monthly amount to invest, rather than a one-off lump sum, this theory could be well worth keeping in mind.

Investment strategies

Most collective funds are actively managed, which means that the fund manager investigates all the potential opportunities available before buying and selling assets to provide a return for the investors.

Alternatively, you can also invest in a tracker fund, which will track a market index such as the FTSE 100. This type of fund is passively managed. It will aim to imitate the movements of a specific index, typically by buying a similar proportion of all the shares in the index to their index weighting. The charges are usually lower than for actively managed funds because you don’t have to pay a fund manager to beat the market or generate a steady return.

Types of collective investment

If you’re interested in pooled or collective investments, you have three main choices of funds at your disposal:

Investment trusts [Link]
Unit trusts [Link]
Life assurance investments