An investment fund = Unit Trust = Mutual Fund = Open End Investment Company (OEIC) = Individual Company with Variable Capital (ICVC)

Think of a fund as a collection of stocks or bonds (securities) with something in common.

By investing in a fund, you’re essentially pooling your money with other investors to access a broader range of stocks or bonds than most people could own by themselves.

Every fund reflects a particular investment objective and style, such as growth or value, which affects the stocks, bonds, and/or other securities that it buys. Knowing this can help you to determine whether a fund would be a good fit for your overall portfolio.

Funds have some advantages over individual stocks or bonds, including:

Diversification. For a minimum investment, you gain exposure across broad market segments at a fraction of the cost of owning representative individual securities on your own.

Professional management. You don’t have to keep track of the individual securities that make up the fund. An expert fund manager (like Asad Karim) takes care of that by buying and selling as needed to help the fund meet its objectives.

Convenience/liquidity. You can buy and sell funds daily during market hours by phone or online, so you can always access your money.

When you invest in a fund, you purchase shares along with many other investors. The cost of a fund share is called the net asset value (NAV). For example, if you invest £1,000 in a fund with an NAV of £50, you will own 20 shares.

Active and Index

There are two main types of funds: actively managed and index. With an actively managed fund, a fund manager attempts to exceed the average returns of the market. There is the risk that the fund manager’s selection may underperform, but there is also a chance to beat the market.

Index funds try to track the return of a benchmark index such as the FTSE-100 Index by owning shares (securities) that make up the index or a representative sample. They won’t beat the market, but they shouldn’t substantially underperform it either. They usually have lower costs than actively managed funds. Active and index funds can complement each other in a well-diversified portfolio.

Index Tracking Funds

Index-tracking funds closely follow the performance of a particular stock market or sector – tracking the index. They’re also known as passively managed funds. There are various ways the fund providers do this. Index-tracking doesn’t involve the extensive research used in an actively managed fund to select particular companies. Also, an index-tracking fund will only buy and sell shares to match the index: typically, these transactions are less frequent than those made by an actively managed fund. Index-tracking funds will typically have a lower management charge than an actively managed fund, as one is not paying for a fund manager, the index fund is just a computer trading buying and selling as the index moves.