UK Investor’s Guide to Mutual Funds

Types of mutual funds

Mutual funds are a type of investment fund. An investment fund is a collection of investments, which could be stocks, bonds, or other funds.

They all have different objectives, risk levels, and strategies. Choosing the right type depends on your financial goals, risk tolerance, and time horizon.

Unlike most other types of investment funds, mutual funds are usually open-ended. That means they issue or redeem shares based on investor demand. So, as more people invest in the fund, the fund will issue more units or shares. This contrasts with closed-ended funds, like investment trusts, which have a fixed number of shares.

Here are some of the most popular types of mutual funds available to UK investors:

How do mutual funds work

When you invest in a mutual fund, your money is pooled with other investors' money. That fund is used to buy a collection of assets which could include shares, bonds, other funds, or a mix. 

A professional fund manager is at the helm, and they decide what to buy and sell in line with the fund's objectives.

Fund managers aim to deliver returns by selecting assets they believe will perform well. Most mutual funds are actively managed, meaning the fund manager makes decisions to try and outperform the market. Others are passively managed, aiming to track the performance of a market index, and tend to be lower cost for investors.

Mutual fund fees

Mutual funds charge fees to cover the cost of managing the fund. These fees vary by fund type and provider, and they can impact your returns over time.

Always check the key investor document (KID) of a fund before investing. Here are the most common types of fees:

Mutual fund pricing

Mutual funds have a unique pricing model. They’re priced once per trading day, based on their net asset value (NAV) per unit.

Here’s what each of those terms mean:

NAV is used to determine the value of the mutual fund, but the real price could be different if it’s trading at a premium (higher than the NAV) or at a discount (lower than the NAV). On Freetrade, open-ended and closed-ended funds are available. Open-ended funds do not trade at a premium or a discount. Closed-ended funds, like investment trusts, can trade at a premium or discount to NAV.

NAV looks at the closing price of the fund’s underlying securities every day. So, when you place an order to buy or sell a mutual fund, you won’t know the exact number just yet. Instead, your order will be executed at the NAV, at the start of the next trading day. Timings will depend on the cut off of each fund.

How does NAV work?

Here’s a simple example. Suppose a mutual fund holds £10 million worth of investments, no liabilities, and one million units in issue. The NAV would be:

£10,000,000 ÷ 1,000,000 units = £10 per unit

If the value of the fund’s investments rose the next day to £10.1m, the NAV would increase to £10.10. Your investment would reflect that change based on how many units you own.

Bear in mind that while the NAV will reflect the fund’s price, it doesn’t necessarily reflect the fund’s performance. This is measured by the fund’s total return, which includes any capital gains, dividends, interest, and realised distributions.

ETFs vs mutual funds

Both ETFs and mutual funds let you invest in a basket of assets, offering a lower risk approach than picking individual shares. They are managed by fund professionals and give you access to a wide range of investment options. But they aren’t one and the same.

What they have in common

• Both involve investing in a group of assets, like shares or bonds
• Both can be actively or passively managed by a fund manager
• Both can offer diversification and usually reduce the impact of an individual asset’s risk‍
• Both can be held in a stocks & shares ISA or self-invested personal pension (SIPP)

Where they differ

• Mutual funds are bought directly from a fund company, rather than on a stock exchange
• Unlike ETFs, mutual funds are only priced once daily, based on their NAV
• Mutual funds are more likely to be actively-managed than ETFs

Pros and cons of mutual funds

How to invest in mutual funds

Investing in mutual funds is similar to investing in any other asset, and it can be done through most investment platforms. With Freetrade, you can start with as little as £50 and choose from a wide range of funds covering different asset classes and strategies. Here’s how to get started:

1. Choose an account type such as a stocks & shares ISA, general investment account, or self-invested personal pension (SIPP)
   
   
2. Decide on your investment goal and risk level
   
   
3. Browse and compare mutual funds
   
   
4. Review a fund’s key facts through its KID to understand the fund’s objective, holdings, and charges
   
   
5. Buy units in the fund through your platform

FAQs

What is the best mutual fund in the UK?

We hate to break it to you, but there is no single best mutual fund. The right fund for you depends on your financial goals, investment time frame, and attitude to risk. For example, some investors prefer equity funds for growth, while others may choose bond or income funds for stability and regular payouts.

Which mutual funds are available in the UK?

There is a wide range of mutual funds available to UK investors. Freetrade offers access to a growing selection, including index funds, thematic funds, and income-focused options.

What is the difference between ‘accumulation’ and ‘income’ for mutual funds?

The key difference lies in how each fund treats its income earned (including dividends and interest):

• Income (Inc) funds pay out this income directly to you as cash. You’ll receive income payments regularly, which can be useful if you’re looking for passive income.
  
• Accumulation (Acc) funds automatically reinvest the income back into the fund, increasing the value of each unit. This can help your investment grow over time through compounding.

Your choice between the two depends on your investment goal: do you want to receive short-term income now, or focus on snowballing it into long-term growth?

Where can I invest in mutual funds?

You can invest in mutual funds through different types of investment accounts:

• Stocks and shares ISA for tax-efficient investing
• Self-invested personal pension or SIPP for tax-efficient and long-term retirement planning
• General investment account for those who have used up their tax-efficient allowances 

Most major investment platforms and apps, including Freetrade, support mutual fund investing within all three account types.

Can I transfer mutual funds into or out of Freetrade?

Yes. You can transfer mutual funds into Freetrade from another provider, or move them out if you decide to switch provider. Transferring helps keep all your investments in one place without having to sell your holdings and potentially trigger capital gains or lose your tax-efficient wrapper.

Transfers in: If your current provider supports it – some may not – you can bring your existing ISA, SIPP or GIA mutual fund holdings to Freetrade.

Transfers out: You can also move your Freetrade-held mutual funds to another provider, depending on their transfer rules. 

What are corporate actions and how do they affect my mutual fund investments?

Corporate actions are events initiated by a company or fund manager that can impact the structure, value, or distribution of your investment. Common examples include:

• Dividends – payments of profits to investors.
• Fund mergers or closures – when two funds combine or a fund winds down, your units may be switched into another vehicle.
• Stock splits or consolidations – adjustments to the number of shares/units you hold, without changing your overall value.
• Rights issues – you either pay more money in to maintain your holding, or the value is diluted.

If a corporate action affects your mutual fund, Freetrade will notify you in-app and handle the process automatically where possible. For some actions, like rights issues, you may need to decide whether to participate, or which option to take.

‍

Important Information: