Not all funds are managed in the same way. When choosing a fund it can help to understand the different approaches used by fund managers.
The fund manager will actively manage the fund using their expert knowledge and experience, together with research and forecasts, to select investments that they believe can potentially outperform a benchmark (such as a market index, cash/inflation or the average return of other similar funds).
Although the fund manager will try to outperform the benchmark, there’s no guarantee that it’ll offer higher returns.
Active fund managers can follow a range of different approaches to investment selection.
2 possible approaches are:
Active funds are likely to have higher costs associated with them as the fund manager will carry out extensive research and will have more regular involvement buying and selling assets, which could incur increased transaction costs.
Passive funds (also known as trackers) are designed to track or mirror the overall performance of a particular benchmark (usually a market such as the FTSE 100 Index). Investors choosing this management style could expect performance in line with the market.
Fund managers of passive funds play a different role to active managers – they select and manage investments that aim to perform in line with a benchmark rather than outperform it.
Passive funds tend to have lower charges than actively managed funds because the fund manager has to follow predefined rules, will carry out less investment research, and will tend to buy and sell assets less frequently so will incur fewer costs.
This is where a fund manager combines active and passive management styles. They may decide to invest part of a fund on a passive basis in order to provide access to some markets at a lower cost, and use active management in other markets where they believe this approach could potentially add greater value.
The charge you pay depends on what type of fund you choose to invest in. This will usually be somewhere between the charges that you pay for a passive fund and those you pay for an active fund.
When choosing your funds it's worthwhile considering what you want the fund to achieve, alongside the costs you're happy to pay and your attitude to risk.
The management style of a fund can sometimes be found within the name of the fund. It’s also included within the fund’s objective which can be found in the Key Investor Information Document (KIID)
Whatever you decide, remember to review your fund selections regularly to make sure they continue to meet your investment goals. Don't forget, all investments carry a degree of risk, so the value of your investment can go down as well as up, and you could get back less than you invest.