Should you invest in funds?
Megan is a senior researcher and writer at Which?, with a background in data analysis and stats in the public and charity sectors.
What is an investment fund?
Investment funds (sometimes called mutual funds) pool your money with that of other investors to give you a stake in a tens or hundreds of stocks, bonds, or other types of investments.
You make money when you sell your holdings in the fund, and from any regular income paid out in the form of dividends.
Here we explain how they work, and whether they're right for you.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
Should you invest in a fund?
A fund provides an easy way to access many different shares, bonds and other assets which spreads out, and therefore often lessens, the amount of risk you take on.
You could pick shares yourself and avoid paying extra fund fees. But that requires time, effort and knowledge in the areas you're investing in. There will inevitably be sectors that you're less knowledgeable about; here, a catch-all approach or a fund manager's expertise can be worth paying for.
The fund manager decides what to invest in and makes changes as time goes on; in exchange you pay them a fee (usually paid automatically by selling some of your holdings). This, however, can eat into any returns you make through the fund.
- Find out more: how to balance your investment portfolio
What are equity funds?
Equity funds invest in company shares.
Historically, equities have delivered higher returns than safer investments, such as savings accounts and bonds, and can act as the real driver for growth as part of a balanced investment portfolio.
Funds vary in their focus. They could be investing in companies in a particular country (such as a UK equities fund), industry (e.g. healthcare), firms of a particular size or a mix of these factors.
You can also invest in different strategies. ‘Growth’ funds will target stocks likely to bring the biggest increases in value, while ‘value’ funds aim to invest in stocks which are cheap relative to their earnings. An ‘income’ fund will aim to invest in stocks and bonds that provide you with consistent regular payments.
You’ll be able to tell what kind of fund you’re investing in, as well as some other information, through its name and the documents provided:
- ‘Acc’ or ‘Inc/’Dis’’ is whether the fund automatically re-invests dividends or pays a regular income. Acc, short for accumulation, is for reinvestment while ‘Inc’, short for ‘income’, and ‘Dis’, short for ‘distribution’ pay dividends out to you.
- The Key Investor Information Document (KIID) and Prospectus will detail how the fund would invest your money and how risky its strategy is on a scale of 1 (not very risky at all) to 7 (very risky).
Other than equities, funds can also invest in bonds and gilts, property, and even other funds (known as multi-manager funds).
What are active funds?
An active fund is a fund run by a manager or team who choose specific investments. They aim to get better returns than the sector they sit within as a whole.
Though beating a market may sound more exciting than tracking it, only 21% of active equity funds were able to outperform the average passive fund in their sector over the 10 years to July 2026, according to AJ Bell.
You might opt for an active fund for specific reasons, for example if you’re looking for a fund that will invest your money with an intentional ethical strategy – which a passive fund can't do.
- Find out more: how to invest ethically
What are tracker and index funds?
Tracker funds track an 'index' – a group of companies, such as the FTSE 100 – by buying all or some of the investments in it.
They are also known as passive investments as they invest across a whole sector or market.
When an index rises, the value of your fund rises with it (after costs). Conversely, when the index falls, your investment in the fund falls with it, too.
Are tracker funds cheaper?
Tracker funds are generally much cheaper than active funds, sometimes costing as little as 0.1% a year (that's £1 for every £1,000 invested), while active funds tend to charge more, such as 0.5% or more.
That difference might not seem huge, but over time those costs will add up. You'll have to pay fees come rain or shine and an expensive fund will make a bad year even more painful.
Here's how £1,000 in a fund costing 0.1% and a fund costing 1% would perform if both funds grew at a rate of 5% per year:
After five years, the cheaper 0.1% fund would be worth £1,275 and the more expensive 1% fund £1,214 - a gap of £61. After 10 years, the gap would be £154.
What makes a good tracker fund?
The best way to judge the performance of a passive investment fund is to look at its tracking error. This shows how far the fund's performance deviates from the actual index it's tracking.
Of course, no tracker fund will identically match an index, as an annual fee is levied on the funds. A tracking error of 0% would mean perfect replication. A tracking error that is just the cost of the fund is an indicator of an excellent passive investment.
Keep an eye on costs. With so many tracker funds tracking the same high-profile indices (such as the S&P 500), you may be able to find a cheaper fund doing the same job.
What are exchange-traded funds (ETFs)?
Exchange-traded funds differ from traditional funds as they are listed on a stock exchange, so you can buy and sell them at any time that the exchange is open.
They generally tend to have cheaper on-going charges, though they may incur extra trading fees from investment platforms. If you buy and sell ETFs frequently, these fees can stack up.
- Find out more: what is an ETF?
How much do funds cost?
Against potential gains, you need to consider a number of costs:
- Ongoing charge figure (OCF) – an annual percentage of your investments you'll need to pay to the fund manager, however the fund performs.
- Performance fees – usually levied by actively managed funds. These typically take 20% of everything above a certain level of performance.
- Trading fees and stamp duty reserve tax – paid when a fund buys or sells a share.
- Exit fees – charged by some funds should you decide to sell your investments.
- Platform fees – levied by the investment platform or financial adviser.
Fund fees can affect how much money you take away, so it's important to see how a fund you might invest in compares to others that are similar.
How to buy and sell funds
The easiest way to buy funds is through an investment platform or an independent financial adviser (IFA).
An IFA can pick investments for you and provide advice on long-term investing strategies and reducing your tax bill.
An investment platform can prove far cheaper, though you'll need to be comfortable picking your own investments. Many 'do-it-yourself' platforms have search tools, news and recommended fund lists to help you make your investment choices.
Do-it-for-me platforms have you fill in a questionnaire about your aims, attitude to risk and interests, before picking a range of funds for you. They tend to charge a little more than DIY platforms.
We've surveyed thousands of investors to find the best investment platforms. We also help you to compare investment platform fees and charges.
Buy within an Isa or Sipp
Buying your funds within a stocks and shares Isa, junior Isa, lifetime Isa or self-invested pension plan (Sipp) means you won't pay dividend tax or capital gains tax.
Lifetime Isas also provide bonuses and Sipps provide tax relief.
Most investment platforms won't charge extra for an Isa, although different platforms may have different funds/assets available to be held within an Isa.
- Find out more: best stocks and shares Isas 2026
Which funds should beginners invest in?
Your attitude to risk and what you're investing for should be the drivers of the funds you choose to invest in.
Funds are a great option for first-time investors as the fund manager can provide investing expertise. Multi-asset funds invest across a range of assets, often structured to appeal to investors with a particular risk appetite.
An '80% equities' fund is higher risk (with potential for higher reward) than a 20% equities fund. This type of fund will be better suited to those with a higher risk tolerance and those who can leave their money invested for longer.
- Find out more: a beginner's guide to investing