What is an umbrella fund?
No, it’s not when you save up for a new umbrella. It’s an investment fund that contains a variety of sub-funds. In theory, this set-up allows you to diversify risk even more than with a regular fund without significantly reducing the returns.
Key takeaways
An umbrella fund is an investment fund containing multiple sub-funds, each with its own strategy investing in stocks, bonds, or commodities, allowing greater risk diversification than regular funds without significantly reducing returns.
Umbrella funds were particularly popular in the 1960s but have fallen out of favour, though they can serve as retirement funds for employers without their own pension schemes.
A major advantage is the ability to easily switch between sub-funds without needing to sell and buy shares, with no transaction fees involved in the switching process.
The main disadvantage is that investors could place too large a proportion of their investment portfolio in one entity, potentially concentrating rather than diversifying risk.
Where have you heard about umbrella funds?
Umbrella funds were particularly popular in the 1960s, but have fallen out of favour somewhat. They can also be a type of retirement fund for employers that don't have their own pension scheme for employees.
What you need to know about umbrella funds.
Each sub-fund within the umbrella will typically have its own investment strategy. Some will invest in stocks, while others might invest in bonds or commodities.
One of the major advantages of investing in an umbrella fund is that you can easily switch from one sub-fund to another. Usually if you want to shift funds, you have to sell your shares in one fund and buy shares in the other. With an umbrella fund, this isn’t an issue, and there shouldn’t be any transaction fees involved.
The disadvantage is that you could end up placing too big a proportion of your investment portfolio in one entity.
Find out more about umbrella funds.
Read our definitions of investment fund and portfolio.