A fund normally has a specific investment focus, such as a type of company, industry or asset that's usually in a set location or economy. Other funds track a stock market index such as the FTSE100 or have a more general objective. For example, they might aim to invest in companies striving for capital growth or high-income returns.
Each fund issues a Key Investor Information Document (KIID). The KIID sets out the fund's key details and objectives, and includes details of the fund's risk profile, performance and charges including the Ongoing Charges Figure (OCF). Before investing in a fund, you must confirm that you've read its KIID.
Fund managers offer their services in return for an Annual Management Charge (AMC) which is taken from the fund's value. The Ongoing Charges Figure is made up of the AMC charged by the fund manager along with the other costs of running the fund. Details of both figures are on the fund factsheet found in our funds research centre.
Funds offer many advantages to all kinds of investors. However, as with all investments, they carry risk. You need to be prepared to take that risk as you could get back less than you initially invested. If you're not sure what fund is suitable for you, it's best to seek independent advice.
There are funds to meet almost any investment goal but before you invest you should consider your personal circumstances, your objectives, how long you want to invest for and your attitude to risk.
Funds can invest in single or multiple asset classes. An asset class is a group of investments that have similar characteristics and behave in similar ways. Asset class examples include:
Unit trusts and OEICs
Unit trusts and OEICs are both open-ended investments, meaning units or shares can be issued or cancelled according to supply and demand. Both types of fund may have either a single price for both buying and selling, or have two prices, a bid price at which you sell and an offer price at which you buy.
Unit trusts and OEICs have different legal structures, but these have little impact on how you invest.
Investment Trusts and ETFs
Investment trusts are also known as closed-ended funds. Unlike a unit trust or OEIC, the number of shares issued by an Investment Trust is fixed.
When you want to invest in one, you don't buy shares directly from the fund manager. Instead, you simply buy shares as you would in a regular share deal. Investment Trusts are listed on the stock exchange and are essentially companies whose business is to invest in the shares of other companies or assets such as bonds or property.
The result is that, unlike investing in an open-ended fund, the price of an investment trust share isn't simply linked to the value of its assets. Instead, it rises and falls in response to supply and demand, just like any listed share.
Active and passive funds
One fundamental difference between funds other than what they invest in is whether they follow active or passive investing strategies.
Both of these approaches normally use a benchmark that reflects the market they invest in - for example a UK share fund might have the FTSE 100 as a benchmark. But the way they use the benchmark is very different.
In an active fund - often referred to as a managed fund - the fund manager attempts to "beat the market" by outperforming the benchmark. They can't outperform all the time - something many investors forget when they focus too much on short-term performance. But over longer periods, they hope the shares they pick will do better than average.
Passive investing simply attempts to match the return on the benchmark as closely as possible. A passive fund - often referred to as a tracker fund - still has a manager, but they don't select investments. Instead, they buy and sell them to ensure that the fund's holdings reflect the benchmark. As the amount of management is limited, management costs tend to be lower for passive funds.
Find out more with our video on Active vs. Passive Investing
A Multi-Manager Fund is an easy and simple way to get a diversified exposure across different asset classes such as shares and bonds, while benefitting from the expertise of investment managers. Multi-Manager funds combine a range of specialist fund managers who look for the best funds available. Having a portfolio diversified across different assets classes may create a less risky investment experience than if you were to invest in a single asset class.
Find out more by watching our Multi-Manager funds video on Stockbrokers TV
Things to remember
Funds offer many advantages to all kinds of investors. However, as with all investments, they carry risk. You need to be prepared to take that risk as you could get back less than you initially invested. If you're not sure what fund is suitable for you, it's best to seek independent advice. There are funds to meet almost any investment goal but before you invest you should consider your personal circumstances, your objectives, how long you want to invest for and your attitude to risk.