What you need to know about investing in funds

One of the most basic investment products is the fund. John Stepek explains the basics of funds, including the difference between active and passive funds, and when you should choose one over the other.

Most of us don't want to pick individual shares and bonds ourselves, so we get others to do the work for us by buying investment funds. You and, say, 999 other people, stump up £100 each. The managers of the new fund collect this £100,000 and invest it. If in two years' time the £100,000 is worth £110,000, your unit of (or share in) the fund will be worth not £100, but £110. If you wish, you can sell that share either in the market, or to the managers of the trust, who will sell it to someone else.

The first such scheme was set up in the UK by London-based solicitor Philip Rose in 1868, when stock investment was largely closed to all but the very wealthy. Rose wanted to provide a vehicle for the ordinary investor to put his capital to work in a fully diversified portfolio. Today, 99,000 investors still have money in his fund now known as the Foreign & Colonial Investment Trust.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.