What are the benefits of funds?

Contributor: CISI |

When the investors decide to invest in a particular asset class, such as equities, there are two ways they can do it – direct investment or indirect investment.

Direct investment is when an individual personally buys shares in a company. Indirect investment is when an individual buys a stake in an investment fund, such as a mutual fund that invests in the shares of a range of different types of companies.

There are a number of benefits stemming from the pooling of funds: 

  • Economies of scale 
  • Diversification 
  • Access to professional investment management 
  • Access to geographical markets, asset classes or investment strategies which might otherwise be inaccessible to the individual investor 
  • In many cases, the benefit of regulatory oversight 
  • In some cases, tax deferral. 

A fund might be invested in shares from many different sectors and regions. This achieves greater diversification reducing risk of one company falling. Of course, the opportunity of a startling outperformance is also diversified away – but many investors are happy with this as it reduces their total risk of total and reduce significantly loss potential. 


Investment styles

There is a wide range of funds with many different investment objectives and styles. One important distinction is between active and passive management styles. 

  • Active management seeks to outperform a predetermined benchmark over a specified time period. It does so by employing fundamental and technical analysis to assist in the forecasting of future events, which may be economic or specific to a company, so as to determine the portfolio’s holdings and the timing of purchases and sales. Actively managed funds usually have higher charges than passive funds. 
  • Passive management is seen in those types of investment funds that are often described as index tracker funds. Index-tracking, or indexation, involves constructing a portfolio in such a way that it will track, or mimic, the performance of a recognised index. 

Indexation is undertaken on the assumption that securities markets are efficiently priced and cannot therefore be consistently outperformed. Consequently, no attempt is made to forecast future events or outperform the broader market. 

Although passive funds generally track an index, there is a growing category of fund that has become known as ‘smart beta’. Instead of tracking just an index, these funds will take into account other factors, such as value or growth, when creating an index that they will track. A smart beta fund can be regarded as a mix of active and passive – it follows an index but is active because it also considers alternative factors. 

More articles

What are stocks and shares?

Contributor: London Stock Exchange |

When you trade on our markets you invest in specific securities, such as shares. London Stock Exchange offers trading shares in companies, from the very biggest to those showing potential for rapid growth. Shares, which are also known as equities, are the basic unit of investment i

Learn more
What should you consider before investing?

Contributor: London Stock Exchange |

Financial markets provide a marketplace for you to buy and sell assets like shares, bonds, currencies, derivatives and even physical products like commodities. London Stock Exchange offers a marketplace for those securities.


What is your a

Learn more
Why investing matters?

Contributor: London Stock Exchange |

Everyone has financial goals. You may want to fund your retirement, help your children with their education or with important life events, such as buying a home.

Grow your money

Investing in assets such as company shares offers you the potential

Learn more


This publication does not constitute an offer to buy or sell, or a solicitation of an offer to sell, any securities, or the solicitation of a proxy, by any person in any jurisdiction who is not qualified to do so, or to any person to whom it is unlawful to make such an offer or solicitation.

Information in this publication is provided ‘as is’ and London Stock Exchange plc (the “Exchange”) does not make any representations and disclaims to the extent permitted by law all express, implied and statutory warranties of any kind in relation to this publication, including warranties as to accuracy, timeliness, completeness, performance or fitness for a particular purpose.

The Exchange does not undertake any liability for the results of any action taken or omitted on the basis of the information in this communication. Information is not offered as advice on any particular matter and must not be treated as a substitute for specific advice. In particular, information in this publication does not constitute legal, tax, regulatory, professional, financial or investment advice. Advice from a suitably qualified professional should always be sought in relation to any particular matter or circumstances.