Find the funds that fit your financial goals

The range of fund types has developed to cover all kinds of investments, markets and management styles. We explain how the main types of fund work, so you can pick the right investments for you.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What the main types of equity and bond funds are.
  • What the difference is between active and passive investing.
  • What multi-asset and multi-manager funds are.

When you invest in the shares of just one company you are essentially putting all your eggs in one basket.

But when you put money into a fund, your money is pooled together with that of other people and invested across a wide range of investments, which helps you to diversify your risk.

As an investor you have an abundance of different types of funds at your disposal, covering a range of asset classes, markets and geographies. While the aim of some funds is capital growth, some look to deliver a regular income, and others aim to do both. Importantly, all risk appetites are catered for and as with all investments, the bigger the potential returns on offer, the greater the risks you need to take on board.

But no matter what type of fund you choose, there is no guarantee of a positive return. Investments may fall in value and you could lose the money you put in.

Here's a summary of some of the main types of fund.

Equity funds

As the name suggests, this type of fund invests solely in shares but the focus can vary greatly depending on which fund you choose. Some funds, for example, will invest in the shares of just one market or region. A UK equity fund will invest in UK listed shares, while a US fund in US listed shares and a China portfolio in Chinese shares, and so on. Other funds may have a broader remit and invest across Europe, Latin America, Asia or Emerging Markets. There are also specialist equity funds, which just focus on a single sector such as technology.

But beware, equity funds can vary, sometimes wildly so, in terms of risk levels. For example, emerging market funds, which invest in countries such as India, China and Brazil are widely viewed as much higher risk than developed market equity funds, such as those that invest in UK and US shares.

Find out more about your attitude to risk

You must also be aware of currency risk when putting money into a fund investing in foreign companies. A falling pound will increase your gains from foreign investments in sterling terms, while a rising pound has the opposite effect, which could lower the value of your returns, or result in you losing money.

Passive and active investing

Equity funds typically come in two styles – passive or active. A passive fund simply tracks a market or index, such as the UK’s FTSE 100 Index. These funds normally referred to as trackers or index funds, buy each of the shares in the same proportions as the index they are tracking. There is no fund manager in the driving seat choosing which shares to buy or sell. Instead passive funds aim to parallel the performance of the index they are tracking in order to match, but not beat, its performance. As such, if the market being tracked goes down, so does the fund’s value, and vice versa. It is because of this that passive funds can essentially be managed by automated trading systems, and as a result can charge some of the lowest management fees around.

Exchange traded funds, known as ETFs, are another type of passive investment which simply mimic a particular market. However unlike index funds which are priced once a day, ETFs are traded on the stock exchange and as such can be traded in ‘real time’ like shares. There is a huge selection of ETFs available to investors, tracking everything from mainstream markets such as the US’s S&P500 to more esoteric areas such as the oil price and even precious metals.

Find out more about Exchange Traded Funds (ETFs)

Active funds on the other hand do have a human being in charge of picking which investments are being bought and sold. With active investing it is the fund manager's job to build up a portfolio of investments to deliver a performance that will outperform the market.

Bond funds

Bonds are essentially like IOUs, issued by governments and businesses looking to raise cash. When you invest in a bond when it’s first issued, you are lending the bond issuer your money for a set period of time. During this term you receive a fixed rate of interest, and when the bond matures, you should get your cash back in full. However, if the issuer of the bond is not able to repay you when the time comes, you will lose your capital. Bonds already issued can be bought and sold like shares and their market value can fall and rise. Bond or fixed income funds, like equity portfolios, also come in a variety of types. There are funds that invest exclusively in a single asset type such as UK gilts – in other words UK government bonds. Others, including corporate bond funds and high yield funds, invest solely in bonds issued by businesses. Some funds known as strategic bond funds, invest in a mixture of the two as well as other type of fixed income investments. Bond funds come in a variety of shapes and guises, and carry many risks. Which type of bond fund will be right for you will depend on your risk appetite and investment goals.

Multi-manager funds

Multi-manager funds, also known as fund-of-funds, invest in other funds, as a means to improve investor diversification. These funds typically package up what they believe to be the best funds and specialist managers into one single fund. Multi-manager funds may include investments across the world or in different countries and regions. The main benefit of multi-manager funds is that investors can profit from the investment styles and specialist knowledge of a wider range of experts. It’s worth remembering that multi-manager funds typically come with higher costs than say a pure equity portfolio, because the underlying funds they invest in have their own annual charges which add to the overall cost.

Multi-asset funds

Multi-asset funds take a diversification of multi-manager funds a few steps further, and are seen as a one-stop-shop, or ready-made portfolios. These funds can invest in a very wide range of assets including, among others, equities, bonds and even commodities such as gold, as well as other funds. They are a simple way for investors to spread their risk and make the most of opportunities in different markets with a variety of investment strategies and styles. The type of multi-asset fund you invest in will depend on your risk tolerance and investment time horizon. The longer you plan to be in the markets, the more risk you may be prepared to take in the hope of achieving higher returns, as you will have more time to recover from any setbacks. Like multi-manager funds, annual charges tend to be higher for multi-asset funds than for single asset funds.

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