Adding Funds To a Portfolio

Equity funds are less volatile than pure equities--plain and simple Editors 10 July, 2013 | 7:00AM
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In-the-know investors buy equities. Those less-in-the-know--or those who choose to know less--own funds. At least that's the rap when it comes to the equities versus funds issue.

But investing doesn't have to be a choice between investing directly in equities or indirectly through funds. Investors can--and many should--do both. The trick is determining how your portfolio can benefit most from each type of investment.

Today's lesson will cover how funds can improve an equity portfolio. We'll discuss how equities can embellis a fund portfolio in another another article.

Because they own a basket of equities, equity funds are less volatile than individual stocks, plain and simple.

Funds Guide You Down the Road Less Travelled

Many equity investors favour the big-name technology, telecommunication, and services stocks--such as BAE Systems and Tesco--that keep our economy humming.

But what about micro-caps you’re unlikely to have heard of, or foreign companies such as Japan's Nippon Telegraph & Telephone? Such off-the-beaten-path securities aren't within most stock investors' purviews. Nor are such stocks easy to analyse, buy, or sell.

That's where a fund can help. Some funds invest in micro-caps, others invest around the globe, still others focus on markets, such as real estate, that have their own quirks. Equity investors who turn over some of their pounds to an expert in these areas gain exposure to new opportunities without having to learn a whole new set of analytical skills.

Funds Balance Your Investment Style

Whether you know it or not, you have an investment style. Maybe you work in the medical field and thus are familiar with and own a number of pharmaceutical and biotechnology stocks. Or maybe you're tech-savvy, with a portfolio full of software and wireless stocks, or, on the flip side, prefer real estate investments backed by bricks and mortar.

But there will be a time when your style falters, at least temporarily, since no single sector will remain permanently buoyant. The market is constantly shifting. No one style remains in favour forever. Instead of boning up on value investing, or growth investing, or whatever style you don't use, hire an expert to do it for you and invest in a fund covering that territory. That way, your portfolio will have some protection when your style slumps.

How To Add Funds

Figuring out your appropriate equity/fund mix is (you knew this was coming) up to you. Begin by looking for gaps in your portfolio. Online portfolio tools like's Portfolio X-Ray and Portfolio Manager can help you in this analysis.

Do you have any foreign exposure? Do your assets cluster in particular sectors or style-box positions? Consider investing in funds to gain exposure to countries, sectors, and styles that your portfolio currently lacks.

Check out our step-by-step guide to getting your portfolio's asset allocation in order and also read up on how diversification can help your portfolio achieve your goals.

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.

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About Author Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.

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