Should you give up on shares and just buy funds?

Do funds offer superior risk/reward ratios compared to shares?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Deciding whether to invest in funds or shares can prove to be a difficult decision for many investors. While funds offer a simple means of diversification and potentially require less time to analyse and manage on an ongoing basis, they can be costly and deliver sub-optimal investment performance. As such, shares are often viewed as more appealing by many investors.

However, with stock markets across the world now trading at or close to record highs in many cases, is it time to ‘trust the professionals’ and buy units in funds, rather than shares in companies?

An uncertain outlook

The outlook for the world economy is highly uncertain at the present time. After a Bull Run in many stock markets across the globe, there are fears that valuations may now be excessive in certain regions and sectors. Therefore, some investors may feel that now is the right time to back the experts through buying funds, since they may have a better chance of identifying favourable risk/reward opportunities in what may be a seller’s market.

While there may be an essence of truth in the idea that valuations are relatively high, the reality is that the outlook is always uncertain for the global economy. Even at times where it feels relatively stable, world economic growth can be hit by a one-off event, or by a financial crisis which turns into a global recession. Therefore, the idea that the current outlook is more favoured to buying funds rather than shares may be fundamentally flawed.

Cost disadvantages

Of course, many fund managers are successful at their jobs and have strong track records of outperforming their benchmarks. The problem, though, is that in many cases the costs to access this outperformance are prohibitively high. In fact, in some cases an annual charge of 1%+ can wipe out any outperformance of a benchmark which is offered by a fund. In this scenario, it may be more profitable to simply buy shares rather than invest in a fund.

This argument is enhanced by the low dealing charges which are now available on shares. With the advent of the internet, sharedealing charges have slumped. While funds are now cheaper to buy than they once were, management charges can still be excessive.

Practicality

Perhaps the main advantage of funds versus shares is their simplicity and practicality. An investor can gain exposure to tens of companies in just one fund, which reduces company-specific risk and may lead to a more favourable outcome. To mimic this level of diversification, an investor would need a large amount of capital, which is often not available.

Furthermore, funds require less time commitment from an investor. The fund manager will conduct the research and due diligence into the stocks in the fund, which means the investor can spend their time in other pursuits. In contrast, shares require monitoring and evaluating, which sometimes dissuades people from buying them.

However, even funds need to monitored, and investors must research which funds to buy. Therefore, the differential in terms of time spent managing shares versus funds may not be all that different. Alongside their lower costs and the fact that there is never a perfect time to invest due to ever-present uncertainty, shares could prove to be the more attractive of the two options for many investors in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »