In the UK there are three principal types of mainstream collective or pooled investment schemes: unit trusts, investment trusts and Open-Ended Investment companies (OEICs).
All three will take the pooled monies of a large number of investors and put them in the hands of a professional fund manager. Their objective is to select a broad spread of instruments in which to invest, depending on an investment remit. The main asset classes available to invest in are shares, bonds, gilts, property and other specialist areas such as hedge funds or guaranteed funds.
There are key differences between the three types of scheme structure.
Unit trusts
Unit trusts are collective investments that allow you to participate in a wider range of investments than can normally be achieved on your own with smaller sums of money. Pooling your money with others also reduces the risk.
The unit trust fund is divided into units, each of which represents a tiny share of the overall portfolio. Each day the portfolio is valued, which determines the value of the units. When the portfolio value rises, the price of the units increases. When the portfolio value goes down, the price of the units falls.
The unit trust is run by a fund manager, or a team of managers, who will make the investment decisions. They invest in stock markets all around the world and for the more adventurous investor, there are funds investing in individual emerging markets, such as South Korea, or in the so-called BRIC economies (Brazil, Russia, India and China).
Alternatively, some funds invest in metals and natural resources, and many put their money into bonds. Some offer a blend of equities, bonds, property and cash and are known as balanced funds. If you wish to marry your profits with your principles, you can also invest in an ethical fund. Some funds do not invest directly in shares but in a number of other funds. These are known as multi-manager funds.
Most fund managers use their own judgment to assemble a portfolio of shares for their funds, which are known as actively managed funds. However, a sizeable minority of funds simply aim to replicate a particular index, such as the FTSE All-Share index. These are known as passive funds, or trackers.
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