Savings and Investments - Magazine

14Understanding your optionsUnlike the so-called activelymanaged funds (a team orindividual chooses stocks thatthey think will beat marketexpectations over the nextfew years) a tracker fund (orpassive fund) aims to followthe index as closely as possible.Are trackers rightfor you?Trackers suit those who wanta low-cost fund that tracks aparticular stock market.Investors can benefit fromhaving a tracker as part of theirportfolio because of the low cost.Charges are one of the keydifferences between trackerfunds and active funds.As they require less day-todaymanagement, trackers tendto have much lower charges.Most will be free to set up andusually cost less than 1% a yearto manage. For active funds,investors can pay up to 5%initially and an annual chargeof up to 1.5%.Trackers remove the risk ofending up in a fund where themanager makes poor decisionsand the fund underperformsthe index.TrackersYou first need to decidewhat to trackand which index is themost suitable to help youachieve your goalsWhat are the risks?Trackers are not risk free. Theyare linked with stock marketfortunes, and performance canvary between rival funds – evenif they’re following the sameindex. It all depends on how theyare structured.Some trackers, for example,will buy every stock in the indexin proportion to its weight, whileothers may use more complicatedfinancial instruments to achievethe same result.These techniques generate atracking error – the differencebetween the performance ofthe fund and the index beingtracked. The charges leviedwill also eat into your returns.Trackers suffer heavily ifparticular key sectors that makeup a major part of the trackedindex go through a rough patch.For example, the FTSE 100 isweighted towards banks andoil companies so, if either ofthese suffer, the index and anyassociated funds will be affected.Choosing your fundDecide what you want to trackand which index will help you toachieve your goals. In the UK, theFTSE 100 may feel like the safestindex to track, but a FTSE All-Sharetracker gives the investor thebenefit of greater diversification.While it’s worth taking trackingerror and charges into accountwhen selecting a fund, this is noguarantee that your funds willperform the best.If you’re new to investing, usean independent financial adviser(see p21). If you’re confident, youmay prefer to see a discountbroker or use a fund supermarketwhen choosing your funds.