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An investment fund pools money from investors into one portfolio of assets, which could be made up of a mix of stocks, bonds, or real estate.
Investment funds offer a straightforward way of diversifying your portfolio, as they might invest in anything from ten to 1,000 assets in a single fund. You don’t have to do the stock picking yourself, so a lot of the investment decisions are made for you. But with those perks can come fees, and as with any investment, investment funds will carry risk.
How does an investment fund work?
Put simply, an investment fund collects money from investors to purchase assets that align with the fund’s goal.
What are common types of investment funds?
Some of the most common types of investment funds are mutual funds and exchange-traded funds (ETFs).
Mutual funds have long been popular among UK investors. In 2024, 19% of UK investors held mutual funds, according to BlackRock. Mutual fund ownership growth has been relatively flat for the past few years, though. Meanwhile, ETFs have become the country’s fastest-growing asset class. ETF ownership increased by 57% from 2022 to 2024, accounting for 8% of UK investors.
Other types of investment funds include money market funds, bond funds, equity funds, index funds, and multi-asset funds. Here’s a table comparing the two main types of investment funds, looking at their similarities and differences.
| \n | ETFs | \nMutual funds | \n
|---|---|---|
| How are they traded? | \nPricing fluctuates throughout the day, depending on market supply and investor demand. | \nTraded once a day, based on the fund’s net asset value (NAV). | \n
| How much do I need to invest? | \nWith Freetrade, you can invest in ETFs for just the cost of a single share. | \nSome mutual funds have a higher minimum investment than ETFs, set by the fund manager. | \n
| Are there commission fees? | \nFreetrade is a commission-free platform, so you will not pay trading or commission fees when you invest in an ETF. Some other platforms may charge commission fees. | \nFreetrade is a commission-free platform, so you will not pay trading or commission fees when you invest in a mutual fund. Subscription fees may apply. Some other platforms may charge commission fees. | \n
| What are platform fees to invest? | \nWith Freetrade, you won’t pay platform fees. Typically, platform fees otherwise range from 0.25% to 0.45% of total holdings, uncapped. | \nAgain, Freetrade doesn’t charge platform fees. With other platforms, these range between 0% to 0.45% of total holdings, often capped. | \n
| What are management fees? | \nCharged by the ETF issuer, ranging from 0.03% to 0.15% on average for a passive ETF, and between 0.63% to 0.75% for an actively-managed ETF. Fees are deducted from your returns. | \nCharged by a fund manager, ranging from 0.5% to 1.5%. These fees are higher than ETFs, as mutual funds have to pay for a fund manager and other administrative costs. Fees are also deducted from your returns. | \n
What is active and passive investing?
Active investing means you are trying to beat the market, often by investing in an investment fund with a fund manager at the helm who is trying to outperform the stock market.
Passive investing means you are investing to try and replicate the performance of an entire index, like the UK 100, which tracks the 100 biggest UK companies, or the S&P 500, tracking the 500 largest US-listed companies.
What are the benefits of investment funds?
As we’ve seen, there are a number of different kinds of investment funds out there. The benefits depend on which kind of fund you are investing in. Though, one advantage across the board for all types of investment funds is that they will generally add quick and easy diversification to your portfolio.
Nevertheless, it’s not as easy as a once-and-done decision when it comes to investing. You should still spread your portfolio across different risk levels, industries, and geographies, so you’re not overexposed to a single theme.
For instance, as of mid-August, 2025, the ‘Magnificent 7’ made up about 34% of the S&P 500. An S&P 500 ETF or mutual fund will give you more diversification than a single stock, but it’s still heavily concentrated in tech.
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