In my last blog I spent time talking a bit about shares and bonds. Usually when you invest in pensions you are confronted with a choice of Investment Funds. Each investment fund will hold shares or bonds or a combination of both. They might also hold property or just be in cash.
An Investment Fund pools investor’s money together. Buying an Investment Fund means that you can spread your money further. If you only have £100 to invest you might only be able to buy one or two shares. If you invested £100 in one Investment Fund you can get a small piece of a lot of shares. For example, if you buy one unit of a Technology Fund you will indirectly own a little bit of each of the company shares that this fund holds. You may own a bit of Apple, a bit of Intel, a bit of Samsung, a bit of Hewlett Packard etc.
This means that you are also spreading your risk. If you only owned one or two shares, you would suffer a significant loss if one of those share prices halved. However if one of those shares were held in an investment fund that you owned it would only have a small impact on you as it would be only one of 40-50 or more shares that the Fund held.
The investment manager who manages the money invested in the Fund decides which shares or bonds to buy and sell and will respond to market conditions so that you don’t have to.
Next time we’ll look at how you might choose which of investment fund to invest your pension contributions into.