A keen grasp of fractions and an understanding of the importance of timing will help this investor
Q: I was interested to read your article ‘Easy Tracker Fund Portfolios for 2017 and Beyond’. As I have just retired and am a beginner investor, I was very interested in the Home and Away Shares portfolio as well as the Simple Two Assets portfolio Moneywise suggested. To get started, I decided to open a Charles Stanley Direct Investment account.
But then I saw that the ‘buy’ prices for two funds in the Moneywise portfolios – Vanguard FTSE Developed World ex-UK Equity Index Fund Acc and Vanguard UK Gov Bond Index Acc – were £302 and £158 respectively for each fund share. I was planning to put about £400 in one of these funds, but I wouldn’t get many shares for that.
Is that how funds work or can you just invest a nominal amount of money in each?
Steve Hazell via email
Initial diagnosis
When you buy an open-ended fund, such as a unit trust or oeic (which stands for ‘open-ended investment company’), you purchase a piece of the basket of assets that it owns. The tiny pieces of the fund are called units in the case of a unit trust and shares in the case of an oeic.
The fund converts your investment into the correct number of units or shares based on the underlying value of the assets in the fund at the time of your investment.
Shares in open-ended investment funds, such as the tracker funds in the Moneywise portfolios, can be bought in fractions of a share.
You are right to ask the question, because shares in companies traded on the London Stock Exchange cannot be divided, so investors who know this are easily confused when it comes to funds. If you wanted to buy shares in petrol giant BP, for example, which at the time of writing on 30 May were trading at 474p, you’d have to buy in multiples of £4.74. However, you’re not planning on investing directly in shares.
Your fund medicine
Rob Morgan, pensions and investments analyst at Charles Stanley Direct, says: “The unit prices on Vanguard funds are high, but that is irrelevant as the buyer will simply end up with the correct fraction of a unit to reflect the amount they use to purchase. It may feel psychologically better to have 150 units of a £1 fund than 1.5 units of a £100 fund, but it will not affect returns in the slightest.
“There is no requirement to buy ‘whole’ units. Investors can buy any fund they choose irrespective of the unit price and could end up with fractions of units in some cases where purchase amounts are low – for instance, with regular savings.
“On the Charles Stanley Direct platform, you can choose whether to buy a number of units or to buy using a monetary amount, for example, £1,000. If choosing the latter (which is most common among investors), you will almost inevitably end up with a fraction of a unit in any fund chosen.”
This would be the case on other DIY investment platforms too. “Many of Vanguard fund’s seem to have these high denominations, but they are by no means the only ones,” adds Mr Morgan. “There are plenty of funds priced in the 100s of pounds.”
Looking deeper
You can buy or sell shares of companies listed on the London Stock Exchange at a known price any time during trading hours (8am to 4.30pm, Monday to Friday). However, when you buy or sell units or shares in funds, be aware that funds are usually only priced and traded once a day.
The reason for this is that the fund company has to look at all of the assets that are in the basket, determine their value and divide that number by the total number of units or shares in the fund. As you can imagine, this can be a complicated process, and the fund company only wants to go through it once a day, usually at noon.
Because of this, it is safer to buy or sell your funds in the morning, while you know the price and there is only a short window for the stock market to experience an upset. If you place your order in the afternoon, your trade won’t be conducted until the following noon, yo u won’t know the price in advance and the stock market could move against you in the meantime.
*Find out more with Moneywise’s Easy Tracker Fund portfolios for 2017 and beyond.
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