The question of shares or funds is less about what is best in theory and more about what suits you. How much time do you want to spend? How much risk can you take? And how much does it matter to you to pick the companies yourself?
Three ways to own shares
Individual shares
You pick the companies and own the shares directly. You pay brokerage when you buy and sell, but no ongoing management fee. In return, you must ensure diversification yourself and keep track of the companies.
Active funds
A manager picks shares on your behalf and tries to beat the market. You pay an annual management fee, higher than for index funds, for the manager’s work.
Index funds
The fund follows an index, for example the global equity index or the main index on Oslo Børs, and owns all the companies in it. No manager tries to pick winners, so costs are very low.
Comparison
| Individual shares | Active funds | Index funds | |
|---|---|---|---|
| Cost | Brokerage on buying and selling | Higher annual fee | Low annual fee |
| Diversification | Depends on you | Good | Very good |
| Time | A lot | Little | Very little |
| Control | Full | None | None |
| Chance to beat the market | Yes, but also to do worse | Yes, but most do not over time | No, you get the market return |
Costs matter more than you think
An annual fee of one per cent sounds small. But it is charged every year, also in years when the fund does badly, and the effect grows over time. Over 20–30 years, the difference between a high-fee and a low-fee fund can amount to a substantial part of the final value.
Studies in many countries have shown that a majority of active funds do worse than their benchmark index over time, after costs. That does not mean all active funds are poor, but that it is hard to pick the ones that will do well in advance.
When individual shares suit you
- You enjoy following companies and want to spend time on it.
- You want control over which companies you own, for example for ethical reasons.
- You have an amount large enough to spread across several companies without fees eating up the return.
When funds suit you
- You want broad diversification without spending much time.
- You save a fixed amount every month.
- You want to own shares from all over the world, not just Norway.
Core and satellites
Many investors combine the two. A core of low-cost, broad index funds gives diversification and low costs. Around the core they hold a smaller number of individual shares, the satellites, in companies they know and believe in. This gives the engagement and control of individual shares without your entire savings depending on your own choices.
Tax
Both shares and equity funds can be held in a share savings account (ASK), so you can switch between them without paying tax along the way. Outside ASK, you can also save in equity funds through an ordinary fund account at most banks and fund platforms. Gains are taxed when you sell, and the shielding deduction applies to both.