Investment funds

A way of achieving a well diversified investment portfolio is to invest in collective investment funds, such as unit or investment trusts. These funds offer a potentially less risky solution than holding a small number of shares directly. Under the supervision of a fund manager, an investment fund pools together money from many investors. This combined pool of money is spread across a number of investments with the aim of reducing the risk of the overall portfolio.

Each fund has an objective which describes what it aims to accomplish for its investors and how it plans to achieve it. Some fund managers will aim to achieve high returns by investing in riskier stocks, which offer potentially higher returns but could also result in higher losses. Others are more defensive, seeking reasonable gains without the threat of big losses. However, no matter where they invest, the value of investment funds may go down as well as up.

Investment funds contain the facility to achieve diversification across a range of investments. The fund pools together money from its investor base to collectively invest in a wide range of stocks, bonds, properties or other financial instruments. Each fund will have an investment objective which outlines its aims and what it is looking to achieve for its investors. The fund manager sticks to a mandate which will dictate the asset allocation and stock picking criterion to which the fund focuses on. For example, some funds will only invest in large companies and others in medium to small companies.

Investing in a collective vehicle, such as a unit trust or investment trust should be viewed as a medium to long term investment to be held for five years or more.

Unit Trusts

These are collective investments whereby your money becomes part of a larger fund that is invested by a fund manager according to the ‘trust deed’. This specifies the primary objectives of the unit trust, together with what sort of investments it can hold and in what proportion. Unit trusts vary in risk profile from extremely cautious to highly speculative. So it is important to match your risk profile to the type of unit trust you buy. The majority of the underlying investments held by unit trusts will vary in value both up and down on a daily basis according to market conditions. This obviously means that the value of your holding in the unit trust will also vary on a daily basis. However, over the medium to long term unit trusts have consistently outperformed interest rates paid on deposit accounts. You should bear in mind that past performance is not necessarily a guide to future performance. Therefore, a unit trust investment should be considered a medium to long term investment and you should aim to hold it for a minimum of five years.

Open Ended Investment Companies (OEICs)

OEICs are similar to unit trusts in most respects although they have a simpler charging structure, specifically no bid-offer spread.

Investment Trusts Investment trusts are similar in concept to unit trusts, but are significantly different in the technical detail. The effect of this is that they tend to have lower charges, but are a great deal more volatile. In general, they are ideal for the more speculative investor.