How do funds work......can someone explain in total idiot proof language?

[tRyer1]

Hi, iv been reading mumsnet for a while and this is my first post as I am in need of advice. Is anyone able to give me quick explanation of how funds work? There are a lot of threads about it, I used to think property was the way to go (still do) but as there is so much talk about funds its something I want to look into but would like to understand in detail before considering doing it.

I'v got a few documents from the net that im going to read though and find an online course but want to start with the basics. lets say I had £50k to invest what sort of 'safe' fund could I invest in to get a good return of 20% min? (my figures might be totally ridiculous expectations - please say if they are).

let's just say that if you knew a fund that returned 20% I and millions of others would be beating your door down!

there is no such thing as a safe investment - you can lose the lot. Long-term the stock market has outperformed property, but it may not in the future. Or it may.

what you are putting your money into is a fund which is used to buy shares in many different companies. There may be a fund manager (so it will cost more to run) or it may be a computer driven tracker which tries to follow the stock market. This will cost less.

look at fund charges as a percentage, and think of this as very long-term.

I am not a financial adviser!

Are you looking for 20% return on investment per year? There is no way you could get that without getting into some very risky investments.

I help manage a large investment portfolio for a charity and we are doing well getting about 4% a year (mostly holding bonds and shares in large, relatively stable companies), but the value of the portfolio goes down in line with the market as well as up.

Also, when you say 'fund', what do you mean? Unit trust, investment trust, portfolio of stocks and trusts managed by a broker or financial adviser, or what?

I think you need to do a lot of reading up on the basics before you start investing any money. I'd look for a beginner's guide to personal finance, and maybe start reading the financial pages of the papers or something like MoneyWeek.

Dammit! Had just name-changed, and then had to name-change back so I won't get reported for spamming/advertising.

Take a look at a site like Hargreaves Lansdown - massive amounts of advice there. You can create a portfolio and manage it yourself.

I started out investing with them years ago, and although 20% isn't realistic for most funds, it can be done. CFWoodford was running close to that in the first year of launch before China got in the way and the markets crashed.

I've learned a lot from HL, and it's actually a lorra, lorra fun managing investments online. You just have to sit on your hands for a few months at a time unless something big happens in the markets and you need to review.

DH has been investing for many years and made 20% one year a long time ago and it was a total fluke. Be prepared for a very long term approach. Can you cope with the times when your portfolio drops and you lose x thousands if you go high risk.

Only invest what you can afford to lose. My sister took some high risk investments with her redundnacy money and it was a disaster. If it sounds too good to be true then it is.

20% return per year is a ridiculous expectation.

You might expect something between 4% to 7% over the long term for an equity fund, but short term the returns could be negative and you should be prepared to face your fund dropping in value by up to 50%.

If you want a "safe fund" you either want a bond fund or your money in the bank. In which case you could probably expect to just about keep pace with inflation. Although I don't really know what you mean by safe. Safe from fraudulent activity or an investment that doesn't go down in value?

IMO, the best book for UK investors is Smarter Investing by Tim Hale. Its not an exciting read, but it really is the best place to start. The best website is Monevator.

Beware of the mainstream media. It is a poor source of investment information and will confuse you with bad advice, noise, short term focus on market fluctuations, hot funds and sectors to invest in and advertorial.

thanks for all your responses, im not going to put anything down until I know it all well enough, although doesn't sound like its worth it with 4% return - not much on 50k investment. Maybe I expect too much.

4% is pretty good at the moment!! As long as Carney continues to hate savers, nothing will change.

BTW you'd be doing well to get that on buy to let.

20% won't happen I'm afraid unless you want to get into high risk funds.

FWIW I work in commercial property and the big funds can yield around 7.5% max on multi-million properties with a quick turnover in the right market.

At least your 4% could eventually be tax free in an ISA, unlike a buy to let which will have taxed income and taxed capital gains.

I take issue with 'you could lose the lot' in a fund. A fund is a collective investment that has exposure to multiple companies. To lose the lot, the whole market would have to fail. You can lose the lot on single shares, VCT's EIS, SEIS, but very unlikely (market Armageddon maybe) in an OEIC or UT.

An investment trust is more volatile than an OEIC or UT due to its closed structure, but again I would take issue with lose the lot.

ETF are a mixed bag depending on their structure. Synthetics, yes I suppose you could.

(Open ended investment company, unit trust, exchange traded fund).

The whole market could fail although it is unlikely - but so is banks going bust and that happened. The market can certainly drop dramatically.

There's also the possibility of fraud with investments; the FSCS guarantee is £50k. No, shouldn't happen -but has.

not safe unless in a bank/building society and under £75k - and then not safe from inflation.

Fraud, yes, but that can happen anywhere and there is protection. Market Armageddon would mean your money wouldn't be safee in a bank (it was less safe last time!) or under your mattress as hyper inflation would get it.... mind you, I think we agree special, I'm splitting hairs