Investment fund guide

Unit trusts and OEICs are both classed as open-ended investment funds as there’s no limit on the number of shares that can be issued, which means any number of people  can invest and there's no maturity date. This means the number of shares or units issued goes up and down depending on supply and demand and their value will also rise or fall, which will be reflected in the overall value of the fund.

But there are differences between unit trusts and OEICs. A unit trust is an investment in which the trust property is divided into a number of defined parts called units. Income and capital of the trust is allocated in proportion to the number of units held. OEICs are set up and structured as companies so investors buy and sell shares on an ongoing basis.

They are priced differently too. Unit trusts generally have two prices – a higher price you pay when buying (the ‘offer’ price) and a lower price you get when you sell (the ‘bid’ price). OEICs generally only have one price at which you buy and sell. These are the prices you should be looking at if you want to see how your funds are performing.

The product documentation (for example the simplified prospectus or fund factsheet) will outline whether a fund is a unit trust or an OEIC.

• Diversification. Funds invest in a range of underlying assets such as shares, bonds, property and so on – regardless of the amount you invest. This can help spread the risk in a way that buying shares in one company can’t.
• Management. Expert fund managers work to deliver the objectives of the fund for you, watch the markets daily, judge the best time to buy/sell and do a lot of the administration.
• Choice. There are thousands of funds to choose from with a range of objectives so there should be one available to match your goals and the level of risk you're comfortable with.
• Access to markets. Funds can invest in certain markets and types of investments that wouldn’t normally be available to individuals.
• Income or growth? You can choose whether you want a fund that gives you a regular income or one that reinvests that income to deliver long-term growth or looks to invest with a view to securing growth in the capital value of its investments rather than income to give you a lump sum at the end of the investment. Some funds offer a mix of growth and income.
• Tax efficiencies. You can put many funds into an investment ISA or personal pension plan and benefit from the tax advantages.
• Liquidity. If you have to, you can cash in your fund at short notice at the current market price, but remember that you should plan to invest for at least five years and you could get back less than you invested irrespective of how long you invest. There may also be circumstances where you cannot get hold of the value of your investment. For these reasons, it is often a good idea to keep a certain amount of money available in an instant access account.
  Withdrawing early does increase the risks of losing money and some providers may also charge you.
• Simplicity. Funds take away a lot of the complexity involved in making investment decisions, which make them a lot more attractive for beginners and others lacking the confidence to invest directly.
• Reduced dealing costs. If you want to buy a range of different investments yourself, you might only be able to invest a small sum in each. This means dealing costs could eat into your profits. By pooling your money with many others in the fund, the dealing costs will be spread between many and will have a much smaller impact on each individual.

What are the risks?

There are a number of risks associated with investing in funds that you need to be comfortable with. You should consider the following:

• The value of your investment and the income it produces can go down as well as up, so you could get back less than you invested.
• Funds have no maturity date but are designed to be held for the medium or long term (usually five to ten years). If you sell earlier you increase the risk that you will lose money, although losses could also occur whenever you sell.
• Remember that past performance is not a guide to future performance.

There are thousands of funds available in the market so it’s important to do your research and find the right one to meet your needs – much like you would when buying a car.

To help, funds are grouped into sectors defined by the Investment Management Association (IMA), the trade body for the UK investments industry. A sector is made up of funds that invest in similar assets or in a specific geographical region such as Europe or North America. The IMA divide the sectors into four broad groups, each with a different investment focus: Growth, Income, Capital Protection and Specialist funds. Some funds choose to remain Unclassified within the sectors.

Details of the fund's IMA sector can be found in the product documents.

When researching a fund, make sure you look at the fund brochure or simplified prospectus and the terms and conditions. The Fund Factsheet – which provides information about the fund including its objective, performance and the fund manager – may also be useful but bear in mind past performance is no guide to what might happen in the future.

For more information, see our feature: How to read a fund factsheet