Why funds are better than shares
But this approach is high risk and expensive. Not only would you have to do an enormous amount of research to pick the most appropriate investments for you, but it would be all too easy to place all your eggs in one basket. You'd also need to invest a huge sum to build a sufficiently balanced portfolio.
All of the individual dealing charges would also make your portfolio incredibly expensive. With property, the costs of purchasing and managing your holding could be particularly prohibitive.
The easy and affordable way to invest in all of these asset classes is via a collective fund. The most popular type is a unit trust or open-ended investment company (OEIC). Here your money is pooled with that of other investors and investments are bought and sold on your behalf by a fund manager in line with the objectives and risk profile of the fund in question.
With such a large amount of money to invest, the manager will be able to buy a lot more holdings that you would be able to (there could be up to 100 companies held in a fund) providing instant diversification and reducing your risk. Costs are shared with your fellow investors.
You can sell your units whenever you like, but from a risk point of view you should be invested for the long term. You pay for this service via the fund's annual management charge. Prior to the abolition of commission payments to the companies, these averaged around 1.5% of the value of your investment, but now they are closer to 0.75%.
Equity funds will buy stocks and shares in companies (they might specialise by region, company size or industry) while bond funds will invest in corporate bonds from a variety of firms and/or gilts (government bonds). Commercial property funds will either buy property direct – typically offices, industrial estates and retail space – with your returns being driven by the rents the manager achieves on those holdings; or will be invested in property-related companies, with your returns linked to the growth in those firms.
Some funds invest across the asset classes and are known as mixed investment funds.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.