The importance of investment 'funds'

We’re all familiar with the saying ‘don’t put all your eggs in one basket’ and for investors it’s sound common sense. It means not holding too much of the same investment, which is also called ‘diversification’. However, if the secret to successful investing were simply to select as many different investments as possible, then making your money grow would be very easy.

When it comes to ISA investing, one of the simplest and most cost-effective ways of managing a portfolio is through the use of investment funds. Funds are a collection of different underlying assets (typically shares or bonds), with the exact make-up decided by a fund manager. As each fund contains more than one holding, in a sense it’s a mini portfolio all on its own. In fact a fund will normally invest in over 30 separate holdings at any one time.

The problem for most investors, however, lies in the sheer number of funds available. At the last count there were over 2,500 funds registered in the UK alone. Choosing the right fund is a difficult task even for experienced investors. 

It’s not just a question of finding a suitable fund. To make matters more complicated, each fund manager will have their own style of investing and may specialise in different areas of the market or a specific geographic region.

For example, there are funds that invest only in the UK, funds that invest in Europe and even funds that specialise in investing in Japanese Smaller Companies or Biotechnology.

There are funds that pay an income and funds that don’t; there are funds that aim to outperform an index and there are funds that try to deliver a targeted or ‘absolute’ return.In short, there are a lot of funds doing many different things.

It is by investing in several different but complementary funds that an acceptable level of diversification can be achieved. Furthermore, with so many fund managers it