Investment funds, sometimes called collective investment schemes, are pooled investments run by fund management companies. Their objective is to grow your money pot in the medium to long, generate an income, or some combination of the two. You purchase ‘units’ or shares in the fund, which are then invested on your behalf according to the fund’s rules and whichever investment objectives are being pursued.

As with many other investments, you can generally choose from a range of funds to invest in, for example, UK and overseas shares, fixed interest securities, other pooled funds, property and cash. Some funds might also use derivatives, which may make the return they are likely to provide different to the returns generated by funds that don’t use derivatives. Whatever funds you choose, it is sensible to review them regularly to make sure they continue to meet your changing needs in the future.

The main types of investment funds are as follows:

Unit trusts: These are simply investment funds that are divided into units, where each unit represents a fair proportion of the fund. When you invest you buy units, the price of which reflects the value of the underlying assets, so if the fund invests in UK stock and shares and they increase in value, your fund will go up in value to the same degree. The assets of a unit trust are held by a body that is responsible for making sure that the fund manager is acting according to the rules of the fund and the Financial Services Authority (FSA).

Open Ended Investment Company: An OEIC is similar to a Unit Trust except that you own shares in the company rather than units as in a unit trust.

Investment trusts: Just like many companies, investment trusts are listed on the stock market, so the price of their shares depends on the value of the underlying investments and on the popularity of the particular investment trust on the market. Thus unlike Unit Trusts, the price of an investment trust does not always reflect the value of the investments it holds. For example, if it invests in UK equities that increase in value, the value of the investment trust is not guaranteed to go up in value to the same degree. However, investment trust charges to tend to be lower than the charges for similar unit trusts and OEICs.

Exchange Traded Funds: An ETF is a funds that tracks the movements of a stock market, sector or commodity index (e.g. oil). They are usually structured like OEICs and issue shares which are traded on the stock market. Unlike investment trusts they closely match the value of their underlying assets, so if the fund invests in UK equities and they increase in value, your fund will go up in value to the same degree. Their charges tend to be lower than for other types of fund.

Exchange Traded Notes: ETNs work differently from, and tend to be of greater risk, than ETFs. While their returns are also linked to the performance of a market or index, they are technically a debt security so their value can be affected by changes to the credit worthiness of the issuing firm. If the firm that issued the ETN goes bankrupt or has its credit rating downgraded, the ETN will lose value even if the underlying index is unchanged.

There are a huge number of funds and other investment products on the market, so there is a lot to think about when considering an investment fund, including:

• Are you looking for capital growth, to generate an income or some combination of the two?
• Which of the numerous type of investment fund is right for you?
• Who is the best supplier for your chosen fund type?
• What charges will be levied when you make your initial investment, and how much will it cost each year to maintain it?
• What happens if you decide you want to change where some of your money is invested?
• What are the tax and cost implications if you need to suddenly withdraw some or all of your money?

As with most financial planning decisions, it may well be worth talking to your Independent Financial Advisor if you are considering participating in an Investment Fund. They should be able to help you to answer the above questions and to help you make the right choice.

You should remember that, as with all investments, their value and the income that they can deliver can fluctuate. You may not get back the amount invested and you should not rely on their past performance as a guide to their future performance. Also remember that factors which may affect their performance such as exchange rates or taxation levels, bases and reliefs, may all be subject to change. Equity based investments do not afford the same capital security that is afforded with a deposit account.