Investment Funds

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Most investors lack the time or experience to give a portfolio of investments the attention it demands. Investment funds, combined with the expert guidance of a financial adviser, can provide an investment solution that is easy to manage and tailored to your needs.

Investment funds (also known as ‘collective investments’Collective investmentsFunds which take money from a number of private investors and pool it together in one fund. This method of investment enables investors to invest in a larger number of investments than would otherwise be the case and therefore spreads their risk. Examples are: unit trusts and OEICS.) give you the ability to diversify a portfolio across a number of different assets simply by investing in a handful of funds. Each fund, under the supervision of a professional fund managerFund manager The professional company responsible for the day to day running of a fund., pools together money from many investors to collectively invest in a selection of shares, bonds, properties or other assets. In this way you are able to reduce your risk by spreading your investments more widely than may have been possible if investing in the assets directly.

Each investment fund has an objective outlining what it aims to achieve for its investors. This helps to choose funds that are appropriate for the level of risk you are willing to take. The objectives can be found on the fund factsheet or Key Investor Information Document (where available). It is the fund manager’s responsibility to create a portfolio that blends different types of shares, bonds and other financial instruments to achieve the objectives of the fund. As with all investments of this nature, the most important thing to remember is that investment funds should be viewed as a long-term investment in order to maximise the potential investment return.

Different fund structures

There are many different structures of investment funds, the most common being ‘Unit Trusts’, ‘OEICs’ (Open-Ended Investment CompaniesOpen ended investment company (OEIC)An OEIC is an investment company where shares can be created or cancelled to match demand, in a way similar to the units of a unit trust. The principal difference lies in the fact that there is a 'single price' to which is added the initial charge for purchase, as opposed to unit trusts which always have two prices, the bid price (what you get when you sell back to the managers); and the offer price (what you have to pay when you buy).) and ‘Investment Trusts’.

Unit Trusts and OEICs operate under different legal structures but work in much the same way. With OEICs you buy shares and with Unit Trusts Unit trustAn investment or company fund which pools together customers' money allowing them to increase the types of shares they can invest in, therefore reducing the risk. Many unit trusts have now become OEIC's, see Open Ended Investment Companies. you buy unitsUnitsWhen investing in a unit-linked contract, the individual's contribution is used to buy units. These units will fall or rise in line with the underlying investments.. They can be set up as single funds or as ‘umbrellas’, which include a number of different funds or sub-funds. Each fund comprises either just one share class or a number of share classes aimed at different kinds of investor.

Unit Trusts and OEICs are open-ended. This means that units and shares can be created or issued when investors invest and cancelled when investors dispose of their holding. This gives you greater flexibility as an investor to move in and out of these types of funds.

Unit Trusts often have two prices associated with them – a bid and an offer price. The offer price is the price at which each unit is bought and the bid price is the selling price of a unit. The difference between the two is known as a ‘bid offer spread’Bid offer spreadThis is a form of charging whereby the price that units are bought and sold at are different. The price of units which a customer can buy is higher than the price at which they can sell the same units. and this pricing mechanism is associated with ‘dual priced’ funds as apposed to ‘single priced’Single priceThis refers to the range of Skandia pension funds where the pricing does not include an initial charge, and hence buying and selling takes place at the same single price of the fund. unit trustUnit trustAn investment or company fund which pools together customers' money allowing them to increase the types of shares they can invest in, therefore reducing the risk. Many unit trusts have now become OEIC's, see Open Ended Investment Companies. funds.

Investment Trusts are closed-ended fundsClosed-end fundA pooled fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed-end funds do not stand ready to issue or redeem shares on a continuous basis. and only issue a fixed number of shares. An Investment TrustInvestment trust A company that invests in shares of other companies. When investing in an investment trust customers actually own shares in the investment trust rather than owning the shares it invests in. Investment trusts are closed-ended investment vechicles. is a company listed on the London Stock Exchange and provide cost-effective access to the stock marketStock marketA place where shares or other securities are bought and sold e.g. the London Stock Exchange. as they invest in the shares of other companies.

An Investment Trust is run by an independent board of directors that are responsible for looking after the interest of shareholdersShare holderThe owner of one or more issued shares of a company who is normally entitled to: a proportionate share of the issuing company’s undivided assets; dividends when declared by the directors; and the right of proportionate voting power.. They may employ a Fund manager The professional company responsible for the day to day running of a fund. directly or more commonly a fund management group to manage the assets as well as the day-to-day running of the fund.

Fund sectors

Equity funds

Equity funds invest in a diversified portfolio of shares of different companies and industries. They each have an investment strategy which, for example, could be to only invest in large companies or only in medium to small companies. There are also funds that will only invest in particular areas, such as health and telecommunications – offering the investor a diversified investment into a particular industry.

Bond funds

Bond funds invest in a diversified portfolio of fixed interest securities, such as government bonds and corporate bondsCorporate bondsA debt security issued by a company (non-government bond) to raise capital. The company undertakes to make regular payments of interest at a fixed rate and to repay capital at a future maturity date (see debenture stock, loan stock and unsecured loan stock).. The securities within the fund will give the investor an income due to the coupons, or interest, paid out.

Funds that invest in government bonds are generally considered to be less risky than funds investing in corporate bondsCorporate bondsA debt security issued by a company (non-government bond) to raise capital. The company undertakes to make regular payments of interest at a fixed rate and to repay capital at a future maturity date (see debenture stock, loan stock and unsecured loan stock).. However, rates are not guaranteed, they can still go down as well as up.

Managed funds

Managed funds or ‘multi-asset funds’ invest in a mixture of assets. Most commonly the majority of the fund is held in equitiesEquitiesAnother name for shares held in a company. and bonds, with the remainder held in other classes such as property or cash. However this varies depending on the objective of the fund. It is important to be aware of the asset split in order to fully understand the risks and rewards inherent with a particular fund.

Each investment fund has an objective outlining what it aims to achieve for its investors

Specialist funds

Specialist funds invest in a specific sector of the economy. No matter which sector of the economy you are interested in investing in, there is likely to be a fund that invests in it. Examples include: Health, Telecommunications, IT and Technology, Property and Natural Resources.

Global funds

A truly diverse portfolio should take advantage of global diversificationDiversificationThe spreading of investment funds among classes of securities and localities in order to distribute and control risk. opportunities. Global funds offer a convenient solution to achieve a geographically diverse portfolio.

If you do not have any specific preferences of countries or regions to invest in, global funds are the easiest way of ‘going global’.

Emerging market funds

Emerging market funds invest in less developed countries that potentially have very high economic growth. Examples include Brazil, Malaysia, Russia, Taiwan and also larger economies like China.

Their high growth potential may be due to a number of factors, such as privatisation, liberalisation of trade, or better access to capital. However, there are, however, higher risks due to factors such as political instability and higher reliance on external capital. The financial markets in such countries can fluctuate quite dramatically. For a private investor it can be difficult to keep track of what is happening within these markets – investment funds can offer more manageable access to these markets. Your financial adviser can provide guidance on how exposed your portfolio should be to emerging markets.