The cheapest way to buy, sell and hold
With savings rates so dire, many are turning to investments to improve returns. While there's still the very real risk of getting less than you put in, funds are a popular way to get started. We run through the basics, key warnings and platforms to buy and sell funds – if you decide it's right for you.
There are no guarantees when you're investing
Investing is a long way from putting your cash in a bank account where it sits to earn interest. An investment is a gamble – instead of the security of guaranteed returns, you're taking a risk with your money. This means your money can go up as well as down in value.
What is a fund?
A fund is essentially a collective investment, where you pool your money with other people rather than choosing and buying individual shares. Funds usually contain a range of shares or other assets, often based around a specific theme, for example, European markets, green companies and corporate bonds.
The exact choice of investments is decided by the fund manager and will either be actively managed (where decisions when to buy and sell are frequently made, with the aim to deliver a return that's better than the stock market) or passive funds (which track a market, with the aim for steady performance rather than maxing returns).
You then buy 'units' in your chosen fund, which rise and fall in line with how well the overall fund performs. Multiply the price of each unit in your fund with the number of units, and you'll have the value of your investment, before any fees.
Funds are generally less risky than buying shares
As funds often include a variety of shares or assets, and the fund manager is working on behalf of a group of investors for a fee, it's usually considered a less risky route into investing compared to buying individual shares, where you shoulder the risk alone.
However there are still no guarantees, and some funds can be high-risk – the theme or combination denotes the risk factor. For example, if the fund focuses on "fledgling biotech companies in emerging markets", all the elements involve a high degree of uncertainty. So if it goes well, you could be in for massive gains, but if it goes badly, massive losses.
Should I invest in a fund?
This really is a personal call, as only you will know if you're willing to risk losing cash, and if so, how much. We can't tell you whether investing is right for you. But if you're going to do it, and are sure you could afford to potentially lose the amount you invest, here are some key points to consider. (First-time investor? Read our beginners' guide to investing to get a broader idea of what's involved).
- Investing is generally a long-term option – you should invest for at least five years. As a rule of thumb, five years allows enough time to ride out any bumps in the market that might see you make a loss on your money. If you know you're going to need access to your money in this time, then perhaps investing isn't the right choice.
- You'll need to factor in fees, as these can eat into your investment. It's not just the performance of the investments within the fund that dictates your rate of return, you'll need to account for fees too. There are a number of costs associated with funds, from platform charges from the provider you choose, buying and selling charges, plus additional management fees associated with the funds you pick (more on this below), all of which will need to be subtracted from any profit (or losses) you make.
- The market is unpredictable – invest on a regular basis to smooth out ups and downs. It's tempting to try to time the market, but it's almost impossible and even the most experienced investors get it wrong. By pulling out of the market as soon as a fund dips or trying to second-guess when a fund will reach its peak, you could lose out on sharp recoveries or see the price go up after you've sold.
Instead, you should invest on a regular basis – this is called 'drip-feeding' in investment lingo. This will give you an added benefit of something called 'pound cost averaging'. For example, invest £10,000 to buy units in a fund valued at £10 each and you have 1,000 units. Yet it you invest the same amount over two months, you'd get 500 units in the first month, but if the fund's unit price went down to £9.50 in the second month, you'd get 526 units.
- Watch out for scams – never buy funds from a cold caller. If you're contacted out of the blue by someone inviting you to invest in a fund, say 'no'. It is almost certainly a scam. Here fraudsters will cold-call investors offering them worthless, overpriced or even non-existent funds.
While they promise high returns, those who invest usually end up losing their money. And remember, if it sounds too good to be true, it probably is.
How to buy and sell funds
The cheapest route for investing in funds is to use an online platform (see platforms to try below) – a one-stop shop for investing in funds, enabling you to buy, hold and sell.
How to buy funds
Once you have an account, you simply search for the fund you want to buy and choose a quantity or value – whichever you choose, you need to have enough money in your account to cover both this and any charges to buy.
Accept the quote it generates and the fund will then show in your account with your chosen platform (your account and the funds in it are often known as your portfolio).
However, it may take a couple of days for the platform to fully process your buy order, so you may get a slightly different price depending on whether the fund's price has moved between you submitting the order and the platform completing the process. But differences should be small unless the market is very volatile with prices moving up and down significantly in short spaces of time.
Many of the large platforms will also give you the option of choosing ready-made portfolios, often based on the level of risk you're willing to take. All the decision making is done for you, but usually comes at a cost (as there are multiple fund management fees) – though if you're not sure what you're doing, this may be better than the money you could lose by making a poor investment decision yourself.
If this route sounds appealing, robo-funds might be a good option to consider (if you want to go down this route, we've robo-fund platforms to try in our Stocks & Shares ISA guide. All providers also do non-ISA investment accounts if that's what you prefer).
What charges do I need to pay?
One of the main considerations when buying, holding and selling funds is how much it'll cost you in charges, so you can avoid big chunks of your investment being swallowed up by fees. Both the platform and the funds you invest in will cost you money, with charges taken from your account and distributed accordingly to the platform or fund manager. The biggies to look out for are:
Charges by the platform
- Platform charge: You may be charged a monthly, quarterly or annual account fee – either as a flat fee (often best if investing £50k+) or as a percentage of your investments (the larger your funds, the more it'll cost).
- Selling/buying funds: The fee you pay each time you buy or sell a fund – you'll often find discounts for frequent traders.
- Transfer out fee: Some platforms charge if you want to transfer your investments to a different provider, usually per fund you hold, or sometimes even just to close your account.
Costs for each fund you hold
- Fund manager/annual management charge: A percentage fee calculated yearly. Expect fees of around 1% on an actively-managed fund, less for a passive tracker fund (robo-funds usually end up somewhere in the middle).
How to sell funds
Selling funds through an online platform is just as simple as buying them. You'll be able to see all the funds you hold in your account, and next to each fund there's usually a sell option. Pressing this will instruct the platform you no longer want to invest in that fund.
Funds are sold the next day
Unlike shares, where you'll get a live price there and then when you instruct to sell, funds are sold on a forward pricing basis. As the price is affected by the underlying shares that sit in the fund, the price will be calculated for the next working day. Fund pricing doesn't move around as much as individual shares, however if the markets are falling you most certainly will lose out, but it shouldn't be by a lot.
You'll be alerted when the fund has been sold and you can either choose to keep the money in your account as cash (though beware as you usually don't get interest), or reinvest in a different fund.
You may not need to sell if you're switching platforms
If you decide to switch platforms, you'll need to consider whether your new platform holds your existing fund(s). If it does, you'll have the option to transfer them over instead of selling. There's usually a fee for this, but it means you'll stay invested in the market for that time.
If it doesn't, you'll need to sell the fund on your existing platform and then buy a different fund on your new platform.
Fund platforms to try
Consider investing through a stocks & shares ISA
Before looking at fund platforms, it's worth you knowing that you can invest up to £20,000 in a stocks & shares ISA. Doing so means you're sheltered from various taxes that are often charged on investments made outside an ISA. For full details, read the Stocks & Shares ISA guide.
Investing isn't MoneySavingExpert's area of expertise. So, we don't tell you here what the 'best' fund platform for you is, or give you any top picks. What we've done is pull out some of the cheaper platforms so you have somewhere to start your own research. Each of the options allows you to have a standalone dealing account or invest through an ISA.
- Platform charge: £100 one-off opening fee
- Online buying/selling fees (per fund): £5
- Transfer-out fee (per fund): None
|iWeb has a one-off fixed opening charge but then no annual platform charge. It has over 2,000 funds, though there's a currency exchange fee of 1.5% for non-UK funds. It's not the most flashy site, but it still offers fund and market information to help you pick.|
- Platform charge: up to 0.25% a year
- Online buying/selling fees (per fund): £1.50
- Transfer-out fee (per fund): £9.95
|AJ Bell has a flat-rate fund dealing charge but a percentage annual platform fee – 0.25% up to £250,000, then 0.10% on £250,000-£1m, 0.05% on £1m-£2m and no further charge over £2m. It has 2,000+ funds with a currency exchange fee of up to 1% for non-UK funds. You can save regularly from £25/mth.|
- Platform charge: up to 0.45% a year
- Online buying/selling fees (per fund): None
- Transfer-out fee (per fund): None
|Hargreaves Lansdown has no dealing charges for funds, but there's a tiered percentage platform fee – so the more you have to invest, the more you'll pay. It's 0.45% a year up to £250,000, then 0.25% up to £1m, 0.1% to £2m and no charge on amounts above that. It has 3,000+ funds with a currency exchange fee of up to 1% for non-UK funds. You can save regularly from £25/mth.|
- Platform charge: £13.99/mth
- Online buying/selling fees (per fund): 2/mth free, then £3.99
- Transfer-out fee (per fund): None
|With a fixed monthly platform charge, Interactive Investor's 'Funds Fan' service plan gives you two free fund trades per month. It has over 3,000 funds, though non-UK funds will attract an exchange fee of up to 1.5%.|
It may also be worth looking at Vanguard. While it's not a platform like the ones above, as it only sells its own funds, it can be a cheap option as it has a low 0.15% 'platform' charge and tends to have funds with low annual management charges too.
Where to get more info for research
See our beginners' guide to investing for more information on how to get started. However, we don't cover what to invest in because we never want to have told you to put your money in something, only for you to lose money on it – though these sites do:
- ADVFN – Live news, lists of gaining and losing companies, company-by-company performance charts, news and discussion forums.
- Hargreaves Lansdown* – Offers news, guides and tools – and you can download a free guide on how to select shares. You can also sign up to a free weekly share insight email.
- Interactive Investor* – Offers information, news and a discussion forum.
- Motley Fool – A wealth of company-by-company information including news, commentary and comparisons of fund performance.
- Citywire – Features financial information on companies, and is also a news source. You can watch shares in a virtual portfolio if you sign up for an account.
If you're not sure how to invest and what to invest in, seek independent financial advice. Read our Financial Advice guide for more information.
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