Whether you are looking at investing in a pension, an investment bond or ISA (Individual Savings Account), you might consider using investment funds. A fund is capital belonging to numerous investors, held in one place and used to collectively purchase securities, while each investor retains ownership and control of his own shares. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power. 

Typically, these pools of money are run and managed by an investment specialist. The manager is paid to make the day-to-day decisions of where the pooled money is invested. The fund manager uses their expertise to make suitable investment decisions in order for the value of the pooled fund to hopefully grow over time.  

Another advantage of pooled investment is being able to diversify.   

Diversification and Risk   

All investments carry some element of risk. The value of the fund can fall as well as rise and you may not get back the full amount originally invested. To enable funds to be able to manage risk, the manager will practice some level of diversification. This works on the premise that holding two different shares is better than two of the same shares. This is because all shares react differently to investment conditions and changes.   

For example, imagine that there are only two companies, one company making t-shirts and one company making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the t-shirt company as they expect demand for t-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling, the other is able to support and perhaps offset the falls, meaning that the investor doesn’t suffer a loss.  

The value of investments may fall as well as rise. You may get back less than you originally invested.  

All types of shares have different characteristics and these characteristics are complex. Fund managers assess and measure these features and make investment decisions based on their knowledge and market experience.

Investment funds will have a particular aim and often belong to a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund remain aligned with the objectives and specification of the fund.

Sectors and Assets – The fund sector identifies the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry. For example, there are funds that only invest in UK companies, or Japanese companies, just as there are funds that invest purely in ‘technology’ companies (IT, telecoms etc). In addition to this, there are sectors that are a mixture of assets. A typical ‘balanced managed’ fund will have some money invested in equities, some in property and some in fixed interest investments or bonds.

Although there are no guarantees as to performance or returns from any sector, our knowledge, experience and insight can indicate how we might expect investments to perform.

• Bank Accounts – Current accounts may offer a very low rate of interest (if any) but they are the most flexible in terms of accessing your money. Banks also offer savings accounts with higher interest rates and notice accounts with competitive interest rates, but you may have to give a certain amount of notice before making a withdrawal (60 or 90 days perhaps), or you must agree to invest the money for a set period.
• National Savings & Investments – These are generally considered low risk as they are government backed. Many National Savings products are tax-free.
• Bonds & Gilts – Are generally considered to be lower risk than direct equities, although the value can still fall as well as rise. Corporate bonds are investments based on business loans offered by private companies and are ‘rated’ based on the ability of the issuer to maintain interest payments and repay the loan. A corporate bond fund will invest in a wide range of these loans. ‘Investment grade’ stock within the bond fund is rated AAA to BBB, whilst stock rated a BB or below is termed ‘junk or non-investment grade’. Some funds also invest in government bonds (known as gilts).

• Property – The long-term historic performance of commercial property has very little correlation with the performance of corporate bond or equity-based investments. For investors looking to diversify their portfolio, property funds have historically offered attractive returns. Income from commercial property funds is often derived from contractually binding contracts of rent paid by business tenants to occupy property. Consequently, leases are often arranged over a long period and generally include an ‘upwards only clause’ which ensures that rents are not negotiated downwards during the lease period, even in times of falling markets.

• Equities (shares) – Over the long-term, equities have historically offered better returns for investors. Although this is not a guide to the future, it is felt that the increased risk of investing in company shares can potentially be rewarded by investment returns in excess of those available from traditional deposit accounts. However, there are no guarantees.
• Investment ‘Funds’ – Specialist investment managers will often manage a fund (a pool of investments) that invests in one or more of the above categories, the aim being to diversify the risk across a spread of equities, bonds, or both. There are hundreds of investment funds available, each with their own specific aims and objectives. Investment funds can also specialise in one particular sector, such as only investing in companies that are listed on the FTSE 100 index, or only investing in construction and mining companies. There are also funds that invest geographically, perhaps only buying shares in Japanese or American companies. Each sector has its own unique characteristics, and your adviser will be able to explain more about this.