how do tracker funds gain in value over time?

Freefall123

I am trying to understand how trackers/ETF's and growth funds for that matter can gain me value over time. What I mean by this is if I buy £1000 worth of a fund, after 10 years this fund may or may not have gone up in value depending how the market is at that time, it could have doubled after 5 years but slowly gone down to its original value by the time I chose to jump off after 10 years, leaving me with the original £1000.

I can get my head around income funds, over time dividends will add to my original £1000 and after 10 years I will hopefully have a profit.

I just cant see where trackers and growth funds ADD value?

Can anyone explain this in laymans terms

Thanks

Freefall

Aegis

Freefall123 wrote: »

I am trying to understand how trackers/ETF's and growth funds for that matter can gain me value over time. What I mean by this is if I buy £1000 worth of a fund, after 10 years this fund may or may not have gone up in value depending how the market is at that time, it could have doubled after 5 years but slowly gone down to its original value by the time I chose to jump off after 10 years, leaving me with the original £1000.

I can get my head around income funds, over time dividends will add to my original £1000 and after 10 years I will hopefully have a profit.

I just cant see where trackers and growth funds ADD value?

Can anyone explain this in laymans terms

Thanks

Freefall

The idea of a tracker fund is that the market will hopefully have risen significantly over the 10 year period you've held onto it for, plus you will have received dividends based on those paid in the index that you are tracking. If you look at a chart of the FTSE over time you'll generally short terms rises and falls with a long term steady growth. Your capital growth comes from that (hopefully) general upward trend, your income comes from the dividends.

Likewise with growth funds, except that usually the manager will try to find companies likely to do well in the short term to invest in, ideally resulting in better returns than simply holding the market.

dunstonh

modern tracker funds also pay dividends. A long time ago they didnt and most structured investments that track the index dont. However, you would have a harder job today finding an investment fund version that didnt. You can either have the income paid out or reinvested (income units) or the unit price will reflect the growth and income that the manager uses to reinvest within the fund (accumulation units).

Growth funds also have income. Although they typically focus on shares that are more likely to have a bias towards growth rather than income. Income funds will have a bias towards holdings that dont necessarily have good growth but pay a good income. With OEICS/UT funds there are now multiple sectors for income focused funds depending on the objective of the fund. e.g. UK Equity Income and UK Equity Income & Growth.

Freefall123

So there is an income part to these funds, good to know. I was worried it was just a case of when to jump with the funds unit higher than when you started.

jamesd

You also use them as part of a balanced portfolio and rebalance to the target split each year. That means that in good years you sell some of the growth part and buy more of the bond part, preserving part of the gain. In bad years the opposite, buying cheaply. The effect of this is that you make money from the ups and downs even if the market is the same at the end as the start.