What is a Mutual Fund?

A mutual fund is an investing vehicle that allows investors to pool their money into a single pot, which is then used to purchase a wide array of investments.

This can include shares, bonds, property, commodities or often a mix of asset classes, depending on the fund’s objective. Each investor owns a proportionate share of the fund’s total holdings, meaning that the performance of the fund directly affects the value of their investment.

In the UK, mutual funds are typically structured as an Open-Ended Investment Company (OEIC) which are designed to expand or contract depending on how many investors are buying or selling units. Unlike Closed-Ended Investment Trusts, OEICs issue new shares as new money comes in and cancel shares when investors exit. This structure ensures the fund always reflects its current size and liquidity needs.

Beyond this, one of the most common features of mutual funds is that they are actively managed. This means that a fund manager decides what assets to buy and sell in pursuit of the fund’s stated investment goal. Investors are not directly involved in these decisions but are entrusting their capital with the manager who is responsible for the market analysis, research and overall strategy.

Mutual funds are priced once per day, based on the Net Asset Value (NAV) of the fund’s underlying assets. Investors buy or sell units at this daily price, unlike with shares or ETFs, which can be traded throughout the trading day. This means mutual funds are arguably only designed for long-term investing.

How do Mutual Funds work?

When you invest in a mutual fund, your money is combined with that of thousands of other investors. The total pool is then managed by a fund manager who follows a specific investment strategy — for example, investing in UK stocks, global technology companies or emerging market bonds.

Let’s say you invest £1,000 in a mutual fund focused on UK dividend-paying shares. That £1,000 is added to the fund’s total assets, which may amount to hundreds of millions of pounds. The fund manager decides how to allocate all that capital; perhaps buying shares in popular dividend stocks like Legal & General or National Grid, with the aim being to generate income and capital appreciation over time.

As the underlying investments in the fund rise or fall in value, so does the Net Asset Value. If a stock held by the fund performs well, the overall value of the fund increases, and so does your investment.

Of course, the reverse is also true. If the market falls, your mutual fund will decline in value too.

The fund manager also reinvests income or distributes it to investors, depending on whether you hold accumulation or income units. Accumulation units automatically reinvest dividends and interest back into the fund, which helps compound returns over time. Income units pay out earnings directly to the investor. Accumulation units are often preferred until retirement at which point regular cash income can become more important than growing larger returns.

Types of Mutual Funds

Just like ETFs, there is a huge array of mutual funds available to invest in, each designed to suit different risk appetites, time horizons and financial goals:

Equity Funds

Equity funds invest in shares, both domestically and globally. UK equity funds might focus on FTSE 100 firms, or specific sectors such as healthcare or financials. Global equity funds may spread investments across Europe, North America, Asia and emerging markets. Equity funds tend to be more volatile but offer higher growth potential over the long term.

Bond Funds

Bond funds invest in government or corporate debt and are typically viewed as lower risk compared to equities. These funds generate income through interest payments and may be suitable for investors seeking stable income, particularly in retirement. UK gilt funds, for example, invest in UK government bonds and are popular for their perceived safety.

Balanced or Multi-Asset Funds

These types of funds combine their investments in equities, bonds and often alternative assets like property or commodities. They aim to strike a balance between risk and return, and often adjust their allocations based on market conditions. Balanced funds are ideal for investors who want a single fund to handle diversification within their portfolio.

Index Funds

Index funds are passively managed mutual funds that aim to replicate the performance of a market index, such as the FTSE All-Share, S&P 500 or MSCI World Index. Because there’s no active management involved, fees are typically much lower than for other mutual funds. They’re increasingly popular among UK investors for their low cost and long-term performance reliability.

Thematic and Ethical Funds

Some mutual funds focus on specific investment themes — such as clean energy or a niche technology. Others are built around Environmental, Social and Governance criteria or adhere to Sharia-compliant investing rules. These funds cater to investors who have specialised needs that may not be catered for elsewhere.

Pros and cons of Mutual Funds

As with all investing strategies, mutual funds have their own set of advantages and drawbacks.

Pros of mutual funds:

• Diversification — mutual funds spread your money across many different assets, reducing the risk of any one investment performing poorly
• Professional management — a qualified fund manager makes all the buying and selling decisions, which can be useful for investors who lack the time or knowledge to manage their investments directly
• Tax efficiency — most mutual funds can be held within a Stocks and Shares ISA, which is free from capital gains and dividend tax
• Highly regulated — UK mutual funds are authorised and regulated by the FCA, and must publish a Key Investor Information Document that outlines the fees, objectives and risks

Cons of mutual funds:

• Fees — many actively managed funds charge higher fees, sometimes over 1% per year. This may not sound like a lot, but fees can eat into long-term returns, especially when compounded over decades
• Performance — not all fund managers outperform the market. In fact, many underperform low-cost index trackers, especially after fees are taken into account
• Lack of control — a double edged sword, as while investors reduce their time commitment, they have no say in the fund’s investment decisions
• Liquidity — mutual funds are priced once per day, so you cannot buy or sell them instantly like shares or ETFs

Considering IG Smart Portfolios

Mutual funds are well-suited to investors who prefer a long-term, hands-off approach to investing. They are a common component of many pension schemes, ISAs and general investment accounts simply because they provide access to the broader market with relatively little effort.

That said, mutual funds are not a one-size-fits-all solution, if only because they are often fairly expensive in terms of fees. We offer an alternative that could be a better fit: the IG Smart Portfolio.

Our fees are lower than many mutual funds and competitors, starting from just 0.50% and capped at £250 per year, per account type. You can create an account in minutes, by simply answering a few questions to help us determine the best portfolio for you.

We sport a range of wealth portfolios, expertly managed by IG and designed by BlackRock – the world’s largest asset manager with over $6 trillion under management.

Your investment will be spread across shares, bonds and commodities to suit your investment needs and risk profile. For context, IG Smart Portfolios are built exclusively with BlackRock’s iShares ETFs, which we believe are the perfect asset if you’re seeking long-term growth. Not only do these ETFs have low fund charges, meaning you can keep more of your returns, but they also provide diverse market exposure to help minimise your investment risk.

Each of our offerings are tailored according to a defined level of risk, and we regularly rebalance our portfolios as market conditions change. This ensures that you have the optimal asset allocation for your risk profile.

Our asset allocation insights from BlackRock are supported by Aladdin, BlackRock’s proprietary portfolio risk management platform, which is licensed by more than 200 external organisations, including some of the world’s largest financial institutions, and is used to analyse over $21.6 trillion of assets.

How to invest in an IG Smart Portfolio with us

For those looking invest in an IG Smart Portfolio with us, here's a straightforward approach:

1. Learn more about our IG Smart Portfolio service
2. Create an IG Smart Portfolio account and select 'ISA' or ‘GIA’ as your portfolio type dependent on preference
3. Answer a carefully selected set of questions, so we can determine your appetite for risk
4. We’ll help you find an IG Smart Portfolio that’s right for your risk profile. If you like what you see, you can activate it in moments
5. Deposit some money into your portfolio and we’ll invest it on your behalf

Investors look to grow their capital through capital returns and dividends - if paid.

But the value of investments can fall as well as rise, past performance is no indicator of future returns, and you could get back less than your original investment.

Mutual Funds summed up

• Mutual funds pool investors’ money to invest in a broad mix of assets, offering built-in diversification and professional management
• In the UK, most mutual funds are OEICs, which expand or shrink based on investor activity, maintaining liquidity and flexibility
• Fund managers make investment decisions on behalf of investors. Mutual funds are priced once daily based on their Net Asset Value, making them suitable for long-term investing
• IG offers a low-cost, ETF-based alternative, with portfolios tailored to individual risk profiles and supported by advanced risk management tools