11th August 2022
general
In general terms, a fund allows investors to pool their money together to buy a range of assets, which will be looked after by a fund manager. But funds can be structured in different ways, so even with similar costs and asset allocation, two fund types can offer different benefits and risks.
Below is a brief guide to the different types of funds you can invest in.
Unit Trusts and OEICs
Unit trusts and OEICs (Open-Ended Investment Companies) are the most widely available investment choices. When investment professionals refer to a ‘fund,’ they will usually be describing a unit trust or OEIC.
The main difference between unit trusts and OEICs is that the former is structured as a trust and the latter is set up as a company. This has very little impact on the investment itself and investors are often unaware of which structure they hold.
Both unit trusts and OEICs are open ended, which means that more shares can be created to satisfy demand. The effect of this is that the price reflects the underlying assets rather than being driven by demand for the fund itself.
The tax treatment is also the same. Investors may pay tax on capital gains, interest, and dividends generated by the fund.
The unit trust/OEIC universe is vast, and funds are further divided into multiple subcategories.
Single Asset or Multi-Asset
Unit trusts and OEICs invest across a range of different asset classes. Some may specialise, for example UK Equity, Emerging Markets, or North American Smaller Companies. These funds will be classified by sector, and must hold a minimum proportion in the selected asset class. This makes it easier to filter funds and compare them to their competitors. These single asset funds are usually selected as part of a wider portfolio.
Multi-asset funds can invest across a variety of asset classes, including equities and bonds from a range of sectors and world regions. These funds are usually classified by the percentage held in equities, for example, 0-35%, 20-60%, and 40-85%. The higher the equity content, the greater the risk and potential reward. A multi-asset fund is effectively a portfolio in itself.
Active or Passive
An actively managed fund relies on research, analysis, and a fund manager’s judgement to choose the underlying assets. The asset allocation might be fixed, or it might change based on the view of the market. The fund may invest in other funds or direct securities such as shares.
Passive funds do not attempt to judge the market or beat the benchmark, but simply to track a selected index. This can be based on a single sector (for example, UK Equity) or it may incorporate multiple indices for diversification.
Actively managed funds are generally more expensive than passive funds. While they might outperform over particular periods, it can be very difficult to choose an active fund that consistently beats passive funds over the longer-term.
Income or Accumulation
Most funds offer both income and accumulation share classes. Income units pay out interest and dividends to the investor, while accumulation units will reinvest any income.
Income units are better suited to investors who require withdrawals from their investments, while accumulation units can help to boost long-term capital growth.
Income is taxable whether it is paid out or not, which means that there is very little difference in the tax treatment.
Insured Funds
If you have a pension or a bond with an insurance company, you will most likely invest in insured funds. These may be specific to the provider, although most insurers offer a range of externally managed funds which ‘mirror’ the equivalent OEIC or unit trust.
Insured funds can appear more expensive than unit trusts/OEICs as the cost of the product is usually built into the fund charges.
Investment Trusts
Investment trusts work in a similar way to unit trusts and OEICs, in that they are collective investments which pool investors’ money to be managed. The main differences are:
Investment trusts can be more volatile than other fund types, even with very similar asset allocation.
ETFs
An ETF (Exchange Traded Fund) is designed to track a specific sector of the market. Most work on passive basis, although there are some active ETFs.
ETFs are traded on the stock exchange, which means that the price fluctuates in real time. They are highly liquid, have small minimum investment amounts, and are usually low-cost. Brokerage costs will normally be applied and will depend on the investment platform used.
Overseas Funds
There are a number of overseas mutual funds available to buy in the UK. These are usually domiciled in Ireland, Luxembourg, or the Channel Islands. These funds are regulated and normally similar in terms of charges, performance, and liquidity as UK funds. You can also choose which currency to buy in, although fluctuating exchange rates can add a further layer of volatility.
The choice of overseas funds is huge, so it’s important to research the options and compare to the equivalent UK fund.
Overseas funds should not be confused with non-regulated funds, although they may be domiciled in the same areas. Unregulated funds have dwindled in popularity due to regulatory crackdowns and wider availability of mainstream investments. While they may have some limited use for professional investors, many people investing in these schemes have lost money, paid excessive charges, or been unable to access their funds for months (or years) at a time. Additionally, if a fund is not regulated, it can be much more difficult to spot a scam. Unregulated funds do not benefit from investor protection if things go wrong.
In today’s market, there are many investment options to choose from depending on your goals, risk profile, budget, and preferences. Holding a wide range of investments for the long term is the best option and any of the above investment types may have place in your financial plan.
Please don’t hesitate to contact a member of the team to find out more about your investment options.
