How do investment funds work?
- Nic Round: Chartered Wealth Manager
- Feb 13
- 3 min read
Updated: 1 day ago
How do investment funds work?
In the UK, an investment fund pools money from many investors and spreads it across a range of assets such as shares, bonds or property. Instead of buying individual investments yourself, you own units in a fund managed by professionals.
Behind this question are often practical concerns:
What am I actually owning?
Who makes the decisions?
How are returns generated?
What risks am I exposed to?
Understanding how investment funds work helps you see what sits beneath the surface of your portfolio.
The basic structure of an investment fund
An investment fund works by:
Pooling money from many investors
Investing that money across multiple assets
Spreading risk through diversification
Charging a management fee for administration and oversight
When you invest in a fund, you do not directly own each share or bond.
You own units in the fund itself.
The value of your investment rises and falls with the value of the underlying assets.
What does a fund actually invest in?
Funds may invest in:
UK shares
Global shares
Government bonds
Corporate bonds
Property
A mixture of asset types
Some funds focus on a single area, such as UK equities.
Others are multi-asset funds, blending shares and bonds within one structure.
The type of fund determines the level of volatility and long-term return potential.
How returns are generated
Investment funds typically generate returns in two ways:
Growth in asset value
Income from dividends or interest
For example:
A fund holding company shares may benefit if share prices rise.
It may also distribute dividends paid by those companies.
If markets rise, the fund value rises.If markets fall, the fund value falls.
Funds do not remove market risk.They spread it.
Active vs passive funds
There are two main management approaches.
Active funds
A professional manager selects investments with the aim of outperforming the market.
These funds usually charge higher fees.
Passive funds
These track a market index, such as the FTSE 100.
They aim to match market performance rather than beat it.
Passive funds generally have lower costs.
The difference is not simply about cost.It is about philosophy and expectation.
A simple example
Imagine:
You invest £50,000 in a global equity fund.
The underlying market rises by 8%.
The fund charges 0.6% in annual fees.
Your gross growth: £4,000Less fees: £300Net gain before tax: £3,700
If markets fall by 10%, your fund value falls accordingly.
The fund structure does not eliminate risk.It distributes it across many companies.
Why funds are commonly used
Investment funds offer:
Diversification
Professional oversight
Administrative simplicity
Access to global markets
Buying dozens of individual shares directly would be complex and costly.
Funds simplify access.
The behavioural layer
Often the real question behind “How do investment funds work?” is:
Why did my portfolio fall?
Why don’t I own individual shares?
Why am I paying a management fee?
Should I be doing this differently?
Investment funds are tools.
The more important question is whether the fund fits your goals, timeframe and tolerance for volatility.
Understanding the structure reduces unnecessary anxiety during market movements.
A more useful question
Rather than asking only:
How do investment funds work?
A more grounded question may be:
Do I understand what my fund is invested in and why it suits my long-term plan?
That shift moves from mechanics to alignment.
And alignment is what ultimately matters.
Some of the most common practical questions people ask about investment funds are below.
Are investment funds safe?
Investment funds carry market risk. Diversification reduces single-company risk but does not eliminate volatility.
Do investment funds guarantee returns?
No. Returns depend on the performance of the underlying assets.
How are fund fees charged?
Fund charges are usually expressed as an ongoing charges figure (OCF) and are deducted within the fund.
Is a fund better than buying shares directly?
Funds provide diversification and simplicity, while direct shares offer concentration and control. Suitability depends on circumstances.
A calm place to think first
If you are reviewing your investments and questioning how your funds work, there is rarely a need for urgency.
Often the first step is to clarify:
What the fund holds
What level of volatility is expected
Whether it aligns with your long-term goals
Evoa exists to provide that quiet thinking space — before advice, before action.
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