Investment Funds
Investment funds are often seen to be the easiest way of profiting from the stock market, because they combine many investments in one fund. The fund is managed by a fund manager, who buys stocks and shares in a wide range of companies. The manager's aim is to maximise investment returns without putting the original capital at unneccessary risk. In order to benefit from increases in the stock market without suffering from its short-term depreciations, these funds are long-term investments: often lasting at least five years.
Owing to the work involved in the management of the investment fund, you will usually be required to pay administration fees. The charges you pay will depend on your investment fund and the requirements of the fund provider, but often you will have to pay a percentage of the total value of your investment as an 'entry' fee, as an annual administration fee and as an 'early-exit' fee if you choose to leave the fund before the end of the investment term. You can choose whether to take your returns as a regular income or reinvest them with the capital and take the increased capital when the fund matures. You can even use your tax-free savings allowance (see ISAs) to 'wrap' some or all of your investment fund, enabling you to earn tax-free returns.
Essentially, there are three types of investment fund: Unit Trusts, Open-Ended Investment Companies (OEICs) and Investment Trusts. As with any investment, the value of your capital can decrease as well as increase. The varying risk associated with each specific investment requires you to thoroughly research the scheme that you wish to join, and ensure that the level of risk taken is not above that with which you are comfortable.
Unit Trusts
Unit Trusts are open-ended, meaning that it is possible to make ongoing contributions to the fund. Each investor represents a unit in the trust, and the number of units will vary depending on the investment supply and demand. Generally, the invested capital will be used to buy shares in a wide range of different companies. However, some unit trusts will allow investors to determine the company shares they wish to buy, allowing you to choose only environmentally friendly companies for your trust. Remember that choosing to focus your investment on a specific type of company may limit the investment spread and increase the risk to your capital: make sure that you take advice before choosing an investment portfolio.
Open-Ended Investment Companies / OEICs
Like unit trusts, OEICs are open-ended and so you can continue to contribute to your investment fund if you have surplus capital. Essentially, OEICs operate in much the same way as Unit Trusts, but they are companies in their own right. When you buy into an OEIC your capital will be invested into a range of companies. Each OEIC has the right to set up an initial 'umbrella' fund, which must be authorised, and then set up a range of small funds underneath this umbrella which need not be authorised. These individual funds can invest in specific areas or businesses, for example ecologically sound companies. In order to buy into an OEIC, you buy shares in the OEIC the price of which depends on the success of their underlying investments. There is no difference between the buying and selling price of an OEIC share: they are always one set price.
Investment Trusts
Investment trusts are closed investments: you cannot continue to invest unless there are shares available for purchase, and only a limited number are issued. Once the shares have all been sold, the investment trust is 'closed' until the investments mature. This enables the fund manager to invest the capital in a range of long-term plans, without the worry that new investments will affect the capital available, or that different investment terms will conflict and destabilise investments. The number of investors and the volume of capital affect the fund manager's investment choices, but usually it is possible to create a wider-ranging investment portfolio than a regular investment account would facilitate.
