Different types of fund
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 circumstances.
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.
One way to view funds is via our Wealth Shortlist. This is a list of funds chosen by our analysts for their long-term performance potential.
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 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.
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.