Understand how funds work
The objective of funds is to grow your money by investing in a range of different asset classes and geographic territories. There are four main types of assets that a fund will invest in — cash, bonds, equities and property and each carries its own potential risks and level of return.
The fund manager decides which assets the funds should hold, in what quantities and when they should be bought and sold to achieve the fund’s aim.
What is an asset class?
There are four main types of investment, which are often called ‘asset classes’. Each one works in a different way and carries its own particular rewards and risks. It is important to understand how they work before you make any investment decisions.
Cash funds invest in cash deposits (for example, in a bank account) and earn a rate of interest.
While it’s the safest form of investment, it’s not suitable for long-term investments as the potential return is low and inflation may erode the real value of your savings over time.
A bond is a loan issued by governments and companies who raise funds by borrowing money from investors. When you purchase a bond, you are essentially lending money to the issuer.
In return for lending it money, the borrower promises to pay a rate of return in addition to the original loan amount when the bond matures.
Bonds are not entirely risk-free and there is a possibility that the government or company could default on its debt, while changes in interest rates may cause the value of a bond to rise or fall.
Investing in commercial property is sometimes seen as an alternative to investing in equities and bonds. As well as aiming for capital growth on the value of a property, rental income is also a source of return.
There are risks and at times, the value of your investments in these funds could fall quite sharply.
Equities are shares issued by companies that trade on the stock market. When you buy a share, you essentially buy a piece of the business and become part owner.
As a shareholder, you have the potential to make money in two ways, either through profits that the company allocates to its owners (referred to as dividends) or through capital appreciation if the share price rises.
Neither is guaranteed however, and there is always the risk that the share price will fall below the level at which you invested.
Direct investment in a single company can be risky, as you are reliant on just one company to perform well, so buying equities through an investment fund spreads the risk.
What is the difference between active and passive funds?
Active funds
Active funds are 'actively' managed by a fund manager, who buys and sells investments on behalf of the fund in order to maximise gains and minimise losses according to the fund's aim.
As the fund is actively managed, the fund managers can strategically react to market situations, taking advantage of insights and opportunities as they happen.
For example, when a particular sector looks like it might be on the up, or one region starts to suffer, the fund manager can move your money either to take advantage of this growth or to protect you from potential losses.
An actively managed fund offers the potential for higher returns than a passive fund, which simply invests in a particular stock market.
We offer a range of actively managed funds through our Zurich Managed Funds.
Passive funds
Rather than trying to anticipate and identify growth opportunities, passive investment funds simply track a particular stock market, such as the NASDAQ or S&P
500.
Instead of investing in some of the assets in the market, a passive fund will invest in all the assets of a market, to give you a return that reflects how the market is performing in general.
So when the stock market index rises, the value of your fund rises with it. And when the index falls, your investment falls too.
We offer passive funds through our Zurich Risk Profile Fund range.