At a basic level, investing in a fund means having a fund manager make investment decisions on behalf of the investor. Rather than following the markets and picking shares or bonds the investor decides on the size of an investment s/he wants to make and hands the money to the fund manager.
The investor receives regular reports on the fund’s performance but has no influence on the investment choices short of removing his/her money from the fund and placing it elsewhere.
Buying into a fund does incur charges so an investor must weigh the advantages .
Risk Management by Fund Manager
Many of the benefits of fund investment hinge on the importance of diversifying investments to reduce risk. Diversification can be achieved in a number of ways. Investors can spread risk across asset classes (such as bonds, cash, property and shares),countries and stock (such as financials, industrials or retailers).
As a general rule, holding one investment is riskier than holding two, three is safer than two, four better than three and so on. This is because all investments do not react in the same way to the same economic conditions.
For example, when shares may be suffering as a result of poor economic conditions bonds may be doing well. When Asian markets are falling, American markets may be rising, and when the service sector is providing strong returns manufacturing may be weakening. This is not to say that these comparisons reflect the nature of the market but to point out that all investments are not the same.
The risk to the investor is reduced because a diversified portfolio means that if some assets do poorly the performance of others may balance them out.