Two routes to the same market
When you buy a share yourself, you pick the company, decide when to buy and sell, and follow its news. When you buy units in an equity fund, the investment manager picks and monitors according to the fund's policy, and you own a slice of the whole portfolio. This lesson covers open-end funds, whose units you buy and redeem at NAV.
Diversification in numbers
That is what diversification does: it softens the effect of one company's trouble. You can do the same yourself by buying many shares, but that takes more money, time and monitoring, and every trade carries a commission. A fund gives you that spread with a smaller amount; in return you pay management fees and leave the choices to someone else.
Costs and exit
With direct shares, you pay commission and fees on every buy and sell, so the more you trade, the more you pay. In a fund, management fees come out of the fund every year, good year or bad, and there may be subscription or redemption fees. On exit, a share is sold during the session if a buyer is there, at the executed market price, and in a thinly traded share an order may not fill or may fill at a different price. A unit is redeemed at NAV on the dates the prospectus sets, so you may not know the exact price when you ask.
Compare for yourself
The funds page shows unit values and performance, and the stocks list shows companies if you prefer to choose yourself.
Check yourself
1. A portfolio holds two shares at equal weight; one falls 30% and the other does not move. How much did the portfolio fall?
2. A widely diversified equity fund, and the whole market falls 20%. What most likely happened to the fund?
Summary
- With direct shares you decide; in a fund the manager decides per its policy.
- A fund gives you spread with a small amount, in return for management fees and exit at NAV.
- Diversification softens single-company hits but not a whole-market fall.