FTSE 100 tracker funds could become increasingly popular over the long run. They offer greater convenience than buying a range of individual shares, while they could prove to be more cost-effective for smaller investors.
Furthermore, a tracker fund helps to spread risk across a large number of stocks. This can reduce company-specific risk and lead to a more favourable risk/reward ratio for an investor.
Of course, buying individual stocks also has its merits, with the prospect of beating the index potentially making it worthwhile over the long run.
Buying units in a FTSE 100 tracker fund is a very simple and straightforward process. An investor needs to decide whether to purchase income or accumulation units, with dividends being paid in the former and being added to the value of the fund in the latter.
As such, there is no requirement to conduct research into the financial strength, growth prospects and valuations of specific stocks. This could lead to time savings that makes a FTSE 100 tracker fund more appealing to time-poor investors.
While the cost of buying shares has fallen significantly in recent years due to the emergence of online sharedealing, building a portfolio of stocks can prove to be expensive – especially for smaller investors.
For example, buying 25 different stocks at a cost of £12 per trade means a total cost of £300. Certainly, regular investing can significantly reduce the cost of buying individual shares, but the cost to sell can be prohibitively high for many investors.
By contrast, a FTSE 100 tracker fund usually charges less than 0.2% per year in management fees. This could make it a more cost-effective option for many investors – especially those who do not have vast amounts of capital at the start of their investing journey.
While it is not possible to diversify away market risk, which is the potential for stock markets to fall, company-specific risk can be reduced through owning multiple stocks.
A FTSE 100 tracker fund equates to exposure to 100 different companies, which means that company-specific risk is significantly reduced. As such, it may offer less risk than a portfolio that contains individual shares, which could make it more appealing to risk-averse investors.
Buying individual stocks
While FTSE 100 tracker funds have appeal, so too do individual shares. The potential for an investor to beat the performance of the wider market could mean that it is possible to generate relatively high returns in the long run. This could mean that you are able to build a larger nest egg and even retire early.
Therefore, for investors with time and capital, individual stocks may prove to be a worthwhile consideration. FTSE 100 tracker funds, though, may present a sound first step in the investing world due to their convenience, low costs and relatively low risks.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.