We simplify all those essential financial decisions
THE EDUCATION SECTIONEvery month we look at a particular financial topic in a little more detail. This month we continue with part 2 of An Introduction to Investing in Funds. Part 1 can be found by clicking here & a downloadable pdf version of both parts 1 & 2 can be found here.____________________________What's the difference between active and passive investing?There are two main approaches to investing, both with advantages and disadvantages.oPassiveinvesting-thismeansinvestinginfundsthatarepurposefullydesignedtotracktheperformanceof aninvestmentmarket,sothereisverylittlehumaninput.It'slikedrivingonamotorwaybutwithoutthe optionofchanginglanes-dependingonhowclearthetrafficis,you'llmovequicklyorslowly.Inthesame way, passive funds go up or down with the market.Therearemanypassivefundsavailable&throughthemyoucantrackmostinvestmentmarkets,like property,goldoranindexliketheFTSE100,whichrepresentsthe100largestCompaniestradedonthe London Stock Exchange.+Tend to be lower cost due to lack of expert inputReturns will be broadly in line with the marketSolid investment when markets are rising-Your investment will fall in value if markets go downUnlikely to outperform the marketNo flexibility to adapt to new opportunitiesoActiveinvesting-anactiveinvestmentapproachoftenmeansthatthefundmanagerisusinghisorher expertisetoseekstrongerreturnsthantheinvestmentmarket.So,incontrasttothepassivecar,ithasthe freedomtochangelanesandfindadifferentroute.Thismeansanactivefundhasthepotentialtoperform better than the market, or "outperform". However, it could also provide less growth than the market.Anactivemanagercanalsotrytomanagerisk,bykeepinganeyeonmarkets,economiesandglobal trends,andsellingassetsthatlooklikelytolosevalue.Thesuccessofthisdependsontheskillofthe manager as well as careful research and analysis.+Flexibility to adapt to changing marketsPotential to outperform the market, but this is not guaranteedMay be able to switch into safer assets in poor economic conditions-Cost more, due to expert inputRisk of underperforming the marketDependent on the skill of the managerWhat do I need to know about sectors?Ininvestmentterms,asectorisanotherwordforanindustrialareaoftheeconomyinwhichcompaniesprovidea similar product or service. There are numerous sectors, though they can be broadly grouped in the following way:Defensive sectors (tend to be safer in a falling market) -oConsumer goodsoUtilitiesoHealth CareGrowth sectors (tend to do well in rising markets) -oTechnologyoFinancialsoEnergyoMaterialsoIndustrialsShould I invest in large or small companies?Therearealsoinvestmentsectorsthatgroupcompaniesbysize.Forexample,ifyouinvestintheFTSE100, you'reinvestinginthehundredlargestcompaniesintheUK.Incontrast,theFTSESmallCapIndexcoverssmaller UK companies that are traded on the stock market.Here are some of the differences:Small companies+Can be quick to respond to changes and new opportunitiesCan grow rapidly-May struggle to weather bad economic conditionsLarge companies+Big enough to survive during tough economic timesSize means lower risk for investorsRelatively stable profits mean some pay regular dividends to shareholders-Can be slow to respond to changes and new opportunitiesShould I invest at home or abroad?Many investors in the UK focus on British companies, bonds and sterling cash savings.Partly,thisisbecausetheUKprovidesamatureeconomywheremajorsocial,economicorenvironmentalupheavalis unlikely.It'salsoawell-regulatedmarketwithnumerouslawstoprotectyoufromillegalorunfairpractices.However, you may want to look farther afield to benefit from diversification and greater opportunities.Why would I want to invest outside of the UK?YoucandiversifyoutsidetheUKbyinvestinginotherWesterneconomies,suchastheUSA,JapanandEurope.Likethe UK,thesearematuremarketswhereinvestmentpracticeswillbetightlycontrolled.Or,youcouldinvestinemerging economies,likeChina,IndiaandRussia,whichareexperiencingrapideconomicgrowthandthereforeofferexciting investmentpotential,althoughgreatervolatility.However,youshouldbeawarethatmanyoverseasinvestments operateinforeigncurrencies,andthereforechangesinexchangeratescanaffectyourinvestmentspositivelyor negatively.Developed Markets+Mature economies, so relatively stableStrong RegulationConsumer Protection-May not offer the strongest growthExchange rate risk outside of the UKEmerging Markets+Have the potential to become leading economies in the futureExperiencing rapid growth-Immature economies, so may be less stablePoorer regulationLess consumer protectionExchange rate riskWhere do I go from here?Hopefully,we'vehelpedyouonthefirststepstowardsmakingthemostoutofinvesting-it's all about taking a balanced view of assets, regions, sectors, and of course risk and reward.Sowhynottakethenextstep&contactusforfull&independentadviceonhowtomakeyour money work harder for you!Finally, as always, do not hesitate to contact us if you would like further details or information.____________________________Glossary of termsActive investing - investing where the returns depend on the skill of an expertAnnual management charge (AMC) - the yearly fee a fund manager charges investors for its expertiseAsset allocation - deciding how much to invest in different asset classes (bonds, equities, cash, etc)Benchmark-astandardagainstwhichtheperformanceofafundismeasured,e.g.anindexsuchastheFTSE 100 IndexBond-aloanfromaninvestortoacompanyorgovernmentinreturnforregularinterestpayments,overapre-agreed period of timeCorrelation - the degree to which assets within a portfolio rise or fall in value at the same timeDerivatives-afinancialcontract,thevalueofwhichisdeterminedbythepriceofsomethingelse(suchasa share or financial index or an interest rate)Diversification - spreading investment across a number of different assets, regions or sectorsDividend - a payment made by a Company to its shareholdersEquity - a share of ownership in a CompanyGrowth - the increase in value of your investmentIncome - the payments you receive from your investmentInitial charge - a one-off fee investors pay to join a fundPassive investing - investing where the returns depend on tracking market movementsReturn - the amount you gain in terms of income and growth in your investmentRisk - the potential for losing value in your investmentImportant InformationThisdocumentisissuedbyTheFinancialGroup,whichisauthorisedandregulatedbythe FinancialConductAuthority,25TheNorthColonnade,CanaryWharf,LondonE145HSandisregisteredinEnglandand Wales, Company Registration No.5838482. ThisdocumentcontainsTheFinancialGroup'sviewsandassuchthisdocumentisdeemedtobeimpartialresearch.We donotundertaketoadviseyouastoanychangeinourviews.Opinionsexpressedareasatthedateofissue(May/June 2013),butmaybesubjecttochange.Thematerialcontainedinthispresentationisforinformationonlyanddoesnot constitute investment advice or recommendation to any reader of this material to buy or sell investments. Investment RisksFundsthatinvestinasmallernumberofstockscancarrymoreriskthanfundsspreadacrossa larger number of companies.Investmentsinsmallercompaniescanbelessliquidthaninvestmentsinlargercompaniesandpriceswingsmay therefore be greater than in large company funds.Whereafundholdsinvestmentsdenominatedincurrenciesotherthansterling,investorsshouldnotethatexchange rates may cause the value of these investments, and the income from them, to rise and fall.Potentialinvestorsinemergingmarketsshouldbeawarethatemergingmarketinvestmentscaninvolveahigherdegree of risk.LessdevelopedmarketsaregenerallylesswellregulatedthantheUKanddonothavethestrictstandardsof accountingandtransparencypresentindevelopedmarkets.Someofthesemarketsmayhaverelativelyunstable governments,economiesbasedononlyafewindustriesandsecuritiesmarketsthattradeonlyalimitednumberof securities.Asaconsequence,boththevalueofinvestmentsmadeandthecaseofwhichtheunderlyingsecuritiescan be bought and sold may be adversely effected.Somefundsmayusederivativesforinvestmentpurposes.Theseinstrumentscanbemorevolatilethaninvestmentsin equities or bonds.