Investing in Third-Party Funds

In my most recent post, I highlighted the importance of diversification within your portfolio to mitigate risk. But how can you manage a diversified portfolio? Do you have the time to monitor and track the performance of all your investments? Having a full-time job (and possibly a kid or two), can make this extremely difficult. One quick solution: Investing in third party funds.



                                                  


When you invest in a fund, you invest in a pool of diversified investments - called the underlying investments¹. The pool of investments is actively managed by a professional manager or institution. This means that the fund manager is responsible for investing in the best bonds, shares etc. in line with the fund's mandate. A fund's mandate is simply the set of rules that the fund manager follows when making investment decisions for the fund. For example, if a fund seeks to provide high income, the fund manager will invest mostly in bonds. If a fund seeks to provide capital growth, the fund manager will invest mostly in shares.

I know what you're thinking; "But how do I know which fund to choose?". This depends on your risk profile and what you wish to achieve. If you are investing for long term growth, hence affording to take a certain level of risk, you can consider investing in equity funds (funds of shares). If you are seeking income, a bond fund is a very viable option. In my next post, I will cover the difference between active and passive funds - and the fees being incurred (even the hidden ones!)


Glossary

Underlying investments - The assets (like shares or bonds) that a fund invests in.


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