Types of investment fund
The benefits of investment funds
Investment funds, also known as mutual funds or collective investment schemes, provide access to a ready-made managed portfolio that helps you diversify your portfolio more than you would be able to achieve by investing directly on your own.
Funds come with a management fee which, in theory, should be cheaper for the small investor than dealing charges if you attempted to invest in each underlying asset on your own, although you should be aware that fees can eat into the long-term return on your investments. Funds can also provide access to investments that you would not be able to trade in as a private investor.
Unit trusts and OEICs
From the point of view of the investor, there is only a little difference between unit trusts and Open Ended Investment Companies (OEICs).
In both unit trusts and OEICs, your money is pooled with that of other investors into a fund. Professional fund managers invest it in a range of shares or other assets on investors' behalf, according to the objectives of the fund and their own investment style.
Investors can buy and sell 'units' in these funds. If the underlying assets increase in value, so will the value of your units. If they fall, the value of your units will also fall. Both forms of pooled investment are popular with new and experienced investors.
The main differences between unit trusts and OEICs are to do with how the fund is structured and how pricing works.
What is a unit trust?
Unit trusts are so called because they're pooled investments that are set up as a trust, and 'units' in the fund are created as investors' money flows in and out. You will see two prices quoted for units in a unit trust: a 'buy' price and 'sell' price. There is also a 'spread,' which is the difference between the 'buy' price and 'sell' price of a unit.
As unit trusts are open-ended investments, the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs.
Each fund has a specified investment objective and is controlled by a fund manager. The value of a unit is equal across the fund.
What is an OEIC?
OEICs are set up as companies so they are governed by company law rather than trust law. The units of investment are shares in the company. Shares are issued or cancelled as investors' money flows into and out of the fund. Rather than a bid and offer (buy and sell) price structure that unit trusts have, OEICs quote a single fixed price whether you are buying or selling your share.
Most new funds launched today are established under the OEIC structure and market analysts predict that, over time, most unit trusts will convert to OEICs.
Other types of investment fund
Other types of investment fund that are also collective investments but are traded differently:
What is a SICAV?
SICAV is an acronym in French (société d'investissement à capital variable which means 'investment company with variable capital'). They were the original 'umbrella fund' that UK OEICs were modelled on. What that means for you as an investor in today's market, is that SICAVs allow offshore providers to market their funds to you on an equal playing field with UK domiciled funds and that simply means there's more choice for you as an investor.
SICAV funds are considered legal entities. Like OEICs, SICAVs are a form of open-ended investment fund, in which the amount of capital in the fund varies according to the number of investors. They are available from continental Europe (Luxembourg is their main home but they're also used for funds in Italy, France, Switzerland, Belgium, Malta, Spain and Czech Republic). They will have a board of directors to oversee the fund. If you invest in one, you can attend the annual general meetings and vote on investment decisions.
What is an ETF?
Exchange Traded Funds (ETFs) originated in the USA and have become increasingly popular here since the first one was launched on the London Stock Exchange in 2000.
An ETF is simply a basket of assets (which may be company shares, stocks, bonds, gold/precious metals, foreign currency, oil futures, wheat, livestock etc.) that trades like a single equity.
They are are pooled investments that give you an interest in the underlying assets. The value of your interests depends upon the performance of those assets, because ETF shareholders are entitled to a proportion of the profits, i.e. dividends paid or interest earned. If you hold shares in an ETF, and the fund is liquidated, you might get a residual value but you do not have direct ownership of the underlying basket of assets.
Because ownership/interest in these assets is divided into tradable shares, the fund is quickly and easily transferred (known as high liquidity). Like shares, ETFs change prices throughout the day, as they are bought and sold at whatever the market rate is. This potentially makes them higher risk than mutual fund shares but they usually have lower fees than mutual fund shares. It makes them an attractive and growing alternative for you as an individual investor.
In the USA, ETFs have surpassed mutual funds as the preferred investment vehicle of financial advisers, according to a 2015 survey conducted by the (American) Journal of Financial Planning. And the trend may catch on here too, with the UK's first ever ETF (iShares FTSE 100 ETF) cutting charges to make them competitive.
What is an investment trust?
An investment trust is set up as a company quoted on the London Stock Exchange, with shares that go up and down according to market forces. Its main activity is investing in equities, shares of other companies. So when you buy shares in an investment trust, you get a 'share' in all of the companies that the investment trust decides to invest in.
Like a unit trust or OEIC, it is managed by professional fund managers who look to manage the fund's exposure to market movements with the aim of producing dividends for its shareholders. The dividend income you will receive from an investment trust, and the value of your investment trust shares, is dictated by the performance of the company shares owned by the trust.
What is a Venture Capital Trust?
Venture Capital Trusts (VCTs) are diversified managed funds that invest in carefully chosen but slightly higher risk small, young businesses that have big plans to expand. The government gives generous tax relief to VCTs to encourage investment in entrepreneurial new companies. Such investments are typically for the longer term (approx 6-10 years), enough time for the companies the VCT invests in to mature to significant value, such as when they are ready for a private sale or an Initial Public Offering. For more information on VCTs, see our guide to Venture Capital Trusts.
Choosing investment funds
If you're thinking of investing in funds, try to select one that suits the length of time that you're looking to invest for and your attitude to risk. Funds are available in a wide range of asset classes, sectors, regions and themes. The level of investment risk involved will depend, in large part, on the volatility of the underlying assets of the fund.
As with all stock market investments, you could achieve a profit or you may not get back all or any of what you invest. While the fund seeks to make both you and they a sustainable return, at least; the returns of investment funds are not guaranteed and you could lose some or all of what you put in. Past performance should be considered but it is never a guarantee of future returns.
Speak to an investment adviser for investment recommendations tailored to your circumstances.
Last updated: 29 May 2015