Investment in Shares or Mutual Funds
When it comes to investing, the level of risk you are willing and able to take has a big affect on your investment choices especially when it comes to an investment in shares or mutual funds.
First lets look at shares.
When you own shares you are directly owning a small part of a company.
Let’s take supermarket chain Tesco for example. If you buy shares in Tesco, you own a tiny part of Tesco! They will pay you a proportion of their profits each year (called a dividend) and if Tesco shares are in high demand the share price will go up and if lots of people want to sell their shares then the share price will go down.
The problem is, if something happens to really rock the share price of Tesco e.g. they lose business to a rival, are involved in a scandal or worst they go bust, the price of your shares is likely to drop dramatically. This is what happened in 2014 when Tesco were involved in an accounting scandal which saw their share price fall 11.5%.
If shares in Tesco is your only investment and all your money is invested in Tesco then you could see large falls in your money and worst still you could lose the lot if they go bust. Now Tesco is a large company, but the risk of this happening if you invested into a smaller company is a lot higher.
A mutual fund, also known as an investment fund or unit trust is a bit like a lake. Lots of investors will pour their money into this lake. A professional fund manager is appointed to oversee the lake and make investment decisions. The fund manager will buy shares in lots of different companies, perhaps a 100 different companies.
So with a mutual fund you own a share in the fund not the individual companies. So effectively instead of owning a part of one company, you now own a part of 100!
When the wind blows and negative events create waves for companies in the stock market you will see the value of your fund go up and down.
During good times for the stock market you will see your fund rise and rise to the point it may overspill and provide you with income or you may decide to take profits and drain a small amount from the fund.
The key differences of an investment in shares or mutual funds
- Investment into one company at a time.
- Concentrated into one sector of the economy.
- No investment manager, you decide when to buy and sell the shares.
- Could potentially lose all your money if the company goes bust.
- No ongoing charges to own the shares although you will pay initial charges and platform charges depending on what provider you use to purchase the shares.
- All your eggs in one basket.
- Potentially investment into multiple companies in one go.
- Can spread investment into different types of investment e.g. shares, property and bonds and different areas of the economy.
- An investment manager will run the fund and make decisions as to when to buy and sell different shares.
- If one company in the fund out of one hundred goes bust, how much effect is this really going to have on the overall fund?
- Ongoing charges are paid out of the fund to the fund manager.
- Spreading your risk.
How to decide whether to make an investment in shares or mutual funds
- Decide how much risk you would like to take. Higher risk may mean you lean more towards investing into shares, less risk could mean funds.
- Would you prefer to spread your risk into different areas of the world and different economic sectors?
- Do you want to spend time monitoring the stock market and checking your shares at regular intervals or would you prefer to not worry about things and let an investment manager handle this for you?
- How confident are you about a particular company and it’s share price? Have you been through the publicly available company accounts?
- Have you received the shares through the company you work for? Be careful about selling these straight away as you may lose benefits.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.