Flexibility and convenience while spreading your risk
Investment companies own a range of investments, so you get access to a diversified portfolio. As you are not dependent on the success of just one or two investments, this spreads your risk.
Managing your own portfolio can be expensive, as you have to pay dealing costs and other fees, which can eat away at the value of your investment. With investment companies, all the investors pool their money and benefit from economies of scale.
Investment companies use professionals to manage their portfolios. Most use an external fund management group to do this, but a few employ their own staff.
You can invest lump sum amounts or on a regular basis, from as little as £25 a month, and stop and start at a time that suits you.
You buy shares in investment companies on the stock market. Today’s online share dealing services mean you can buy and hold investment company shares very easily and economically, often more cheaply than other funds.
Because the shares of investment companies are traded backwards and forwards on the stock market, the portfolio manager does not have to hold cash, or sell investments, to give you your money when you decide to sell. Being ‘closed-ended’ means investment companies can invest in less liquid asset classes that other funds cannot offer, such as private equity, infrastructure and commercial property. These have the potential to deliver better long-term returns or higher levels of income.
Investment companies have a number of advantages over other types of fund when it comes to paying a regular income in the form of dividends. They can keep some of their income back in good years to maintain or boost dividends in leaner ones. Investment companies can also invest in a far wider range of income-producing investments.
Though higher levels of income can come with increased risk, many investment companies have been able to increase their dividends for decades.
Investment companies have independent boards of directors which look after your interests as an investor. The directors meet several times a year and monitor the company’s performance. They can even replace the fund manager if the performance of the company is not satisfactory.
Investment companies can borrow money to make additional investments (‘gearing’). The idea is that the additional investments make enough money to meet the costs of the debt and make a profit on top. If it works, the more the company borrows, the more profit it makes. If the investments fall in value, however, the more the company borrows, the more it loses. Gearing offers the potential for higher profits, but also increases the risks. However, not all investment companies use gearing and most only use modest levels.
An investment company’s share price is mostly driven by the value of its portfolio. However, it can also be affected by general sentiment towards the company and other factors. As a result, the share price may be higher (‘at a premium’) or lower (‘at a discount’) to the value of the underlying investments. So, depending on when you buy or sell your shares, the returns you get may be better or worse than you might expect.
