Funds are a bit like a pick and mix sweetie bag, there’s something for everyone. When looking around, you’ll notice that funds are often listed according to: the country or continent they invest in;
- the country or continent they invest in;
- the class of investments they make;
- how they are managed.
The abundance of choice may appear overwhelming, especially if you’re trusting someone you’ve never encountered with your hard earned savings. But by breaking the different types of funds down, it becomes easier. Funds can be generally categorised as:
The investment companies, on behalf of a number of investors, manage these funds. Managed funds invest in a combination of assets from different regions. There are limits on how much of the fund can be made up with shares. There are three types of managed fund – cautious, balanced, and active. Cautious managed funds will invest about half your money in shares and the rest in fixed interest investments to minimise risk. Active managed portfolios, in comparison, can have up to 100% invested in equities, providing they have at least 10% invested in non-UK stocks and shares.
Asset based funds focus on a particular type of asset, such as technology, financial services or healthcare. Specific geographical regions, such as UK Corporate Bond Fund, or Global Property Fund, may provide further focus.
Geography based funds invest mainly in investments from a specific country or region. These can be named areas such as Northern America, Japan and The UK. There are also relative regions such as Emerging Europe, which would include countries such as Turkey or the former Baltic States. Some geographically based funds carry a high risk. It’s vital to seek advice about these prior to investing.
Tracker Funds are designed to match the performance, good or bad, of a particular index such as the FTSE 100, or FTSE Europe. Because investments are based on the index and not individual choices made by a fund manager, trackers are cheaper to run than managed funds, therefore charges are less.
Designed for investors that want to have a clear conscience. Ethical funds invest in companies because of their moral, or ethical stance towards factors such as animal testing and the environment.
There are generally three types:
1. funds that exclude companies that have a negative impact such as tobacco or oil companies;
2. funds that only include companies with a positive impact, such as alternative energy companies;
3. and funds that invest in companies with a view to influencing their stance by becoming a major shareholder.
In these three groups the funds may specify other limits, such as investing in Corporate Bonds or Shares in companies on a particular index.
What else should you know?
Income or Growth
Most funds, unless they are specifically designed for income or growth, offer the option of paying out income to you, or reinvesting it back into the fund for growth.
It is usual to invest in more than one fund to achieve a good spread of different investments. This helps to reduce risk because you are invested in more than one area. So you might choose a UK Corporate Bond Fund a UK Equity Fund, and a Global Equity Fund to counteract fluctuations in one area.
Taking the next step
It is important to also look at each fund in isolation and the breakdown of investments, before making comparisons.