Different types of funds (2024)

Important Information: Please remember that the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice. Tax rules can change and the value of any benefits depends on individual circ*mstances.

Active vs passive

While all funds have different strategies and aims, there are two main types of fund available: active funds and passive funds.

Actively managed funds

As the name suggests, the manager actively chooses the underlying investments held in the fund on the investors’ behalf, aiming to outperform the market and their peers. The fund manager will continually undertake research and analysis, and then update the investments in the fund when they feel it necessary. This means that over time, they will buy and sell different assets depending on market conditions.

Passive funds (also known as index tracking funds)

These funds aim to match the performance of a particular stock market index – often by simply investing in every share in the index being tracked. The FTSE 100 (a list of the 100 biggest companies in the UK) is an example of a commonly followed index. These funds can offer a convenient, low-cost way to gain exposure to a broad range of investments.

Another main difference between active and passive fund management is the fees charged. As they require less day-to-day management, passive funds usually have lower ongoing charges. With actively managed funds, the extra work and analysis involved means investors generally have to pay more in the way of charges, although having your money with a good fund manager can justify this extra cost.

Income vs accumulation

Many funds, both active and passive, give investors the choice between investing in either income or accumulation units. The difference is how the income generated by the investments in the fund is treated.

For example, if a fund is invested in shares, these shares will often pay dividends and thus generate an income. The income version of a fund will distribute these dividends to investors as cash. With the accumulation version, the fund manager instead uses the cash to buy more shares, increasing the value of each unit in the fund.

Those investing with the aim of generating an income could consider choosing income units. Those looking for long-term growth in their investment will probably wish to choose accumulation units.

Investment trusts

Investment trusts are similar to funds as pooled investments. But they differ as they are traded on the stock market (rather than directly through the fund manager). As such, unlike funds which typically value once a day, they have a share price which moves up and down in value when the stock market is open.

See Also

Understanding Feeder Funds

While there are many good quality investment trusts available, investment trusts often involve more sophisticated techniques than regular funds, such as the manager borrowing money to try and boost returns. This can make them a higher risk investment.

VIEW OUR GUIDE TO FUNDS FOR MORE INFORMATION ON INVESTMENT TRUSTS

NEXT: HOW TO CHOOSE A FUND TO INVEST IN

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Now, let's delve into the concepts discussed in the provided article:

Risk Warning and Investment Disclaimer: The initial disclaimer emphasizes a fundamental principle of investing – the value of investments can fluctuate, and past performance is not indicative of future results. This sets the tone for a cautious approach to financial decision-making.
Active Funds: The article distinguishes between active and passive funds. In actively managed funds, the fund manager takes an involved role in selecting investments with the goal of outperforming the market. Continuous research and analysis guide decisions, and the portfolio is actively adjusted based on market conditions.
Passive Funds (Index Tracking Funds): Passive funds, on the other hand, aim to replicate the performance of a specific market index. The FTSE 100 is cited as an example. These funds provide a cost-effective way to gain exposure to a broad range of investments without the same level of day-to-day management as active funds.
Fees and Costs: A crucial point is made about the difference in fees between active and passive funds. Active funds, requiring more management, generally have higher charges. The article notes that while passive funds have lower ongoing charges, a skilled fund manager in an actively managed fund may justify the higher cost.
Wealth Shortlist: The concept of a "Wealth Shortlist" is introduced, which is a curated list of funds selected by analysts for their long-term performance potential. This provides investors with a streamlined way to navigate the multitude of available funds.
Income vs. Accumulation Units: The article explains the choice between income and accumulation units within funds. Income units distribute dividends as cash to investors, while accumulation units reinvest the income by buying more shares, potentially increasing the value of each unit. This choice depends on an investor's goal – generating income or seeking long-term growth.
Investment Trusts: Investment trusts are likened to funds but differ in that they are traded on the stock market. The distinction in valuation frequency is highlighted, with investment trusts having a share price that fluctuates throughout the trading day. The article also notes that investment trusts may involve more sophisticated techniques, such as leveraging to enhance returns, making them a higher-risk investment.

In conclusion, the article provides a comprehensive overview of key concepts in investment, catering to both novice and experienced investors. It emphasizes the importance of understanding the nature of funds, the distinction between active and passive management, and the considerations when choosing between income and accumulation units. The introduction of investment trusts adds another layer of complexity, reinforcing the need for careful consideration and informed decision-making in the investment process.