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What is a fund

A fund is a type of investment that starts with a pool of investor capital, deployed by a fund manager according to a set of financial goals, providing access to a very wide range of investment opportunities, both broad and specialised. In short, it enables multiple investors to collectively purchase securities, whilst retaining ownership and control of their shares. As with a listed company, a fund is collectively owned by its shareholders, with a board of directors overseeing the governance and regulatory compliance.

Investors may buy into actively managed funds to gain specialist expertise in a particular asset class/region/sector and where exposure might otherwise be difficult or expensive. They also might not have the time to research and manage the investment themselves, preferring instead to utilise the expertise of a fund manager.

How funds work

A fund’s specific appeal will be based on its objectives, which could be as simple as exceeding its benchmark, capital appreciation or delivering a regular income. The strategic direction of the fund and its day-to-day running, including the portfolio composition and when stocks are bought and sold, is controlled by a fund manager. They use their specialist knowledge to choose the assets, with each investor owning a portion of the total fund. The investment objective and policy of the fund dictate what the fund manager purchases.

  • Fund styles – active vs. passive


Funds managed actively are those where fund managers use their expertise to manage investment portfolios, usually with the aim of outperforming an agreed benchmark. Advantages of actively managed funds include:

  • the ability of active managers to tailor portfolios to investors’ precise requirements
  • the ability to adjust risk parameters according to changing market conditions
  • the chance that an actively managed fund will outperform its benchmark

Drawbacks of actively managed funds include higher charges and the possibility of underperforming its benchmark.


Passively managed funds are the opposite of actively managed ones. A passive fund aims to replicate the broader market (for example an index like the S&P 500) and will typically charge lower fees than an actively managed fund.

While passive investors believe that the market will deliver positive returns over time, drawbacks of passive investing include market risk, in other words, when the overall market falls, this will be reflected in the returns of a passively run fund. As passive funds are designed to track their benchmarks, they will not be able to outperform.

Starter Guide to investing

When you’re new to investing, getting started can seem like an uphill struggle. That’s why we decided to create a starter pack to help demystify the process and provide an introduction to the basics.


More articles from our New To Investing mini-series

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