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Back to Basics: What is a Fund?

VIDEO: Samuel Kemp, aged 10, asks Morningstar analyst Jon Miller all about funds and how to pick the best ones

Holly Black 2 September, 2019 | 9:58AM

 

 

Samuel Kemp: Hello, my name is Samuel Kemp. This is Jon Miller. And today, we're going to talk about funds.

Hello, Jon.

Jonathan Miller: Hi, Samuel.

Kemp: What is a fund?

Miller: So, a fund is a way of investing. And we should always think about investing in the long term. And what there is in a fund is lots of different holdings, so different companies and together, that means that you can invest for your future. Now, if you were to put £20 in a fund, and I was to put £20 in the fund, and it was the same one, our investments in the future would move up and down in exactly the same way. There's lots of choice out there. But ultimately, it's the way of investing and getting access to different parts of stock markets.

Kemp: So, how many funds are there?

Miller: Well, in the UK, we're sitting here in the UK, if you're a UK investor, there's probably over 3,000 funds you can invest in, which is lots of choice. Those funds have then got different characteristics. So, some might invest in what we call shares, some might invest in bonds, and they're in different areas of the world. So, if you want to invest in Japan, you've got Japan funds; if you want to invest in the UK, you've got UK funds; if you want to invest in the US, you've got North America funds. So, that's how it gets all divided up into quite a wide number.

Kemp: And so, how do you pick a fund?

Miller: Well, that can be a bit of a tough one. Because when there's 3000, where do you start? Well, we think there's too many already. Quite a lot of funds are small, expensive, and been around for a long time without delivering much. So, we think fees are important. We also look at the teams, the people behind the funds, are they stable, their process, so what they look for in companies or characteristics when they're investing, and we look to see if they stick to that.

So, you can also invest in a way that just tracks a market. So, just to add a bit more to that; how do you pick if you don't know what you want to do in the UK, you can just pick a fund that tracks the U.K. stock market, so you don't have to worry too much about is the manager going to beat the market or not beat the market. So, a couple of ways there to think about it as well.

Kemp: Thank you. And what makes a good fund?

Miller: So, we think a good fund will have some of the attributes that we look at, that we see delivering. So, a team, coming back to that, that is stable; the people that have shown over the long term they can work together, collaborate; what we call the process, what they look for in companies, see that that's been consistent. We think fees are important as well. Because when you go and pay for something, it starts eating into your money you invest, because your fees come off the money you put in. So, we look at quite a few of those characteristics. And when we think quite a few of them are good, we start liking that fund.

Kemp: And what makes a bad fund?

Miller: A bad fund really has quite a few of the opposite things. So, if it's small and expensive, again, that acts as a drag on the money you're investing; fees come off the money you put into the stock market. Also, where there's a lot of change. So, where there's a manager that leaves or an assistant manager, or a team gets unsettled. You see it in sports where a manager leaves or a captain changes or the star player leaves. The team can start performing worse once the bits get disjointed. So, we think of it like that as well. And when we see that what they look for in terms of companies they invest in, and that that has a deterioration over time or the changing the way they think – coming back to a sports team, are they doing something different, are the people unsettled, they are not sure what to do. It's kind of similar things that come into play there as well that can make something actually appear bad as well.

Kemp: Thank you, Jon. Goodbye.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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