Unless you invest directly in an investment, like buying shares in a company, most of the time you will be investing in a fund. The make-up of each fund varies from fund to fund.
The fund manager uses your money to choose and invest in the various components that make up the fund. For example, a UK equity fund may invest in the shares of UK companies only. Other funds may invest in a combination of assets (bonds and property for example).
Pooled funds
Pooled funds are very popular. These are collective investments where lots of people put their money into the same fund. You are buying a piece of the total pool. Investing in a pooled fund means you can benefit from reduced dealing costs and administration. Pooled funds tend to be either unit trusts or investment trusts.
Unit trust
A unit trust is an investment fund shared by lots of different investors. It is an 'open-ended fund' which means the fund gets bigger as more people invest and gets smaller as people withdraw their money. The fund is run by a fund manager who makes the investment decisions.
The fund is divided into segments called 'units'. Investors take a stake in the fund by buying these units. The price of a unit is based on the value of the investments the trust has invested in.
Investment trust
An investment trust is a company whose line of business is investing in other companies.
The investment trust company has shares and is quoted on the stock market. You take a stake in its fund by buying the shares of the company. It is a 'close-ended fund' because there are a set number of shares and this number does not change regardless of the number of investors.
Unit or investment trusts can be categorised according to the type or style of investments that they make:
Tracker funds
There is no fund manager actively choosing and switching shares in a tracker. Instead, the investments are chosen to move in line with a selected stock market index, such as the FTSE 100. Because there's no active management involved, charges are usually lower.
Specialist
A specialist fund invests in particular sectors, such as the Far East, or particular types of shares, such as small companies. These are suitable only if you are comfortable with higher risk.
Ethical and socially responsible
Ethical and socially responsible funds can be general or specialist funds, but some investments (for example, shares in defence companies) are excluded and others (say, shares in companies with good employment practices) are actively selected.
Sharia
A sharia fund is one which is compliant with Islamic laws on finance.