What is a fund?

Why funds exist

Imagine you want exposure to 500 large US companies. Buying shares in each one individually would require enormous capital, significant time, and constant management. A fund lets you achieve the same outcome with a single purchase.

This is the core appeal: diversification and simplicity in one step. Rather than researching and selecting individual companies, you delegate that process either to a fund manager (active funds) or to a rules-based index (passive funds).

Active vs passive funds

An active fund employs a manager who selects investments with the aim of outperforming the market. For this, they charge higher fees — typically 0.5% to 1.5% per year or more.

A passive fund — also called an index fund — simply tracks a market index. No manager is trying to beat the market; the fund just mirrors it. Fees are much lower, often between 0.05% and 0.25% per year.

The research on this is consistent over long periods: the majority of actively managed funds underperform their benchmark index after fees are accounted for. For most long-term investors, passive funds offer a better deal.

What a fund might hold

Funds can hold almost any combination of investments depending on their objective:

• Equity funds hold shares in companies
• Bond funds hold government or corporate debt
• Mixed or multi-asset funds hold both, often in a fixed ratio
• Regional funds focus on a specific market — UK, US, emerging markets
• Global funds spread across many countries and sectors

How funds charge you

The main cost is the Ongoing Charges Figure, or OCF (sometimes called the Total Expense Ratio, or TER). This is an annual percentage deducted from the fund's value — you do not pay it as a separate bill. It compounds quietly over time, which is why keeping it low matters considerably for long-term outcomes.