Investment

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Pensions guide » Individual Pensions » Investment » Fund types

Different types of investment fund

We describe here some different types of investment funds. If you have an investment fund which you do not think fits into any of the descriptions given here please let us know and we will add it to the list.

UK Equity funds

What are "UK Equity funds"? - UK Equity funds invest in UK Equities. Equities are just another term for shares (i.e. investments on the stock market). If you invest in a UK equity fund you will in some way be investing in the UK stock market. What can I expect from a UK Equity fund? The market value of the fund will be volatile (i.e. the value will go up and down daily). The unit price of the fund will go up and down and you may sell these investments at a lower price than you paid for them. The fund will not guarantee you a particular return. The return will depend on the performance of the stock market and also the performance of the manager in charge of the fund in which you invest. UK Equities are expected to produce superior returns than bonds and cash as the risk associated with investment in equities is greater. This is not to say they will produce higher returns but only that they are expected to produce higher returns. Who are they suitable for? - These investments may suit those with an appetite for some risk who are sufficiently far from retirement (generally in excess of 5 to 10 years) to bear the volatility of the returns.

Overseas Equity funds

What are "Overseas Equity funds"? - Overseas Equity funds invest in Overseas Equities. Equities are just another term for shares (i.e. investments on the stock market). If you invest in an Overseas equity fund you will in some way be investing in a stock market based in a foreign country. The fund may specify exactly where the monies will be invested or may invest them over a number of different countries or regions. What can I expect from an Overseas Equity fund? The market value of the fund will be volatile (i.e. the value will go up and down daily) and you may sell these investments at a lower price than you paid for them. The fund will not guarantee you a particular return. The return will depend on the performance of the stock market and also the performance of the manager in charge of the fund in which you invest. Overseas Equities are expected to produce superior returns than bonds and cash as the risk associated with investment in equities is greater. This is not to say they will produce higher returns but only that they are expected to produce higher returns. The fund may be more volatile than a UK Equity fund as the fund may also be exposed to currency risks. i.e. If the value of the currency in the country in which you have invested reduces relative to the pound then the value of your investment in pounds will reduce. If the fund is based in a developing country with a rapidly expanding economy it may be expected to produce superior returns to a UK equity fund. Who are they suitable for? - These investments may suit those with an appetite for some risk who are sufficiently far from retirement (generally in excess of 5 to 10 years) to bear the volatility of the returns.

UK Government Bond funds

What are "UK Government Bond funds"? - UK Government Bond funds invest in UK Government bonds. UK Government bonds are bonds issued by the UK government. When the government wants to raise money it can issue bonds. Essentially an investor pays a sum of money to the government and in return receives the 'bond'. The bond pays regular interest to whomever holds it and a return of capital at the end of the term.    What can I expect from an UK Government bond fund? The market value of the fund can be volatile (i.e. the value will go up and down daily) and you may sell these investments at a lower price than you paid for them. However the volatility of a bond fund is less than the volatility likely to be experienced if you were investing in an equity fund. The fund will not guarantee you a particular return. The return will depend on the performance of the bonds and also the performance of the manager in charge of the fund in which you invest. UK government bonds funds would not be expected to produce superior returns over equities. However the risk associated with bonds is lower and the UK government has never defaulted (i.e. not paid out) the interest or capital due on a bond. If the fund invested in conventional (i.e. bonds whose returns are not linked to inflation) there is a risk that the fund will offer poor returns during a period of unexpectedly high inflation Who are they suitable for? - These investments may suit those with an appetite for a relatively low risk investment or those close to retirement.

UK Corporate Bond funds

What are "UK Corporate Bond funds"? - UK Corporate bond funds invest in UK corporate bonds. UK Corporate bonds are bonds issued by the UK companies. When a company wants to raise some money it can issue bonds. Essentially an investor pays a sum of money to the company and in return receives the 'bond'. The bond pays regular interest to whomever holds it and a return of capital at the end of the term. What can I expect from an UK Corporate bond fund? The market value of the fund can be volatile (i.e. the value will go up and down daily) and you may sell these investments at a lower price than you paid for them. However the volatility of a bond fund is less than the volatility likely to be experienced if you were investing in an equity fund. The fund will not guarantee you a particular return. The return will depend on the performance of the bonds and also the performance of the manager in charge of the fund in which you invest. UK corporate bond funds would not be expected to produce superior returns over equities. However the risk associated with corporate bonds is lower (though still higher than the risk associated with government bonds). Companies do sometimes default on these bonds and this is reflected in the higher available returns on corporate bonds than on government bonds. There is a risk that the fund will offer poor returns during a period of unexpectedly high inflation as almost all corporate bonds are not linked to inflation. Who are they suitable for? - These investments may suit those with an appetite for a medium level of risk and those close to retirement.

Property

What are "Property funds"? - UK property funds generally invest in commercial property. Commercial property includes shops, office, warehouses and new developments. Some funds will also invest in equities which themselves are involved in the property market, i.e. builders etc. What can I expect from an Property fund? The market value of the fund is likely to be quite volatile and will fluctuate. You may sell these investments at a lower price than you paid for them. The return will depend on the performance of the properties held and also the performance of the manager in charge of the fund in which you invest. UK property funds would be expected to produce superior returns over bond based funds. Who are they suitable for? - These investments may suit those with an appetite for some risk who are sufficiently far from retirement (generally in excess of 5 to 10 years) to bear the volatility of the returns.

With profits

What are "With profit funds"? - With profit funds usually invest in both bonds (government and/or corporate) and equities. The market value of with profit units is not volatile. The units will increase each year at a rate determined by the insurance company that runs the fund. This is called a reversionary bonus. At the end of the period of investment an additional bonus (called a terminal bonus) may be payable in addition. The funds are designed to give a smooth return with returns above those expected from a bond fund through some exposure to the equity market. What can I expect from a With profits fund? The market value of the fund will be smooth. You will not sell these investments at a lower price than you paid for them unless something distratous happens to the life insurer. With profit funds would be expected to produce returns somewhere between those available on a bond fund and an equity fund. The return will not be guaranteed but your capital is normally safe. Who are they suitable for? - These investments may suit those with a medium appetite for risk and for whom the security of a smoothed return is a comfort. Market Value Reductions or Market Value Adjustments - Some with-profit funds apply what is known as an MVR (or MVA) to money when they are moved out of the with-profits fund before retirement. With profits funds accrue bonuses year on year and are intended to smooth out the fluctuations in the underlying investment markets. Companies are currently applying MVRs to withdrawals because funds are being withdrawn at a low point in the market and they believe that paying out full funds would be inequitable to other policy holders. If you are considering transferring your money from a With profits fund then it would be sensible to seek out independent financial advice before doing so.

Managed fund

What are "Managed funds"? - With profit funds usually invest in both bonds (government and/or corporate) and equities. The market value of the fund will be volatile. A managed fund is just a combination of different investments all under one fund. The manager of the fund will decide how to invest the money in the fund. What can I expect from a Managed fund? The market value of the fund will be volatile (i.e. it will change from day to day) and you may sell these investments at a lower price than you paid for them. The returns expected from the fund will depend on what assets the managed fund invests in and how much investment skill the manager has. The return on the fund will not be guaranteed. The wider ranging classes of investments may make this a desirable investment because of the extra diversification of the fund (i.e. not all your eggs are in one basket). Who are they suitable for? - These investments may suit those with an appetite for some risk who are sufficiently far from retirement (generally in excess of 5 to 10 years) to bear the volatility of the returns.

Lifestyle fund

What are "Lifestyle funds"? - Lifestyle funds will invest in equities will you are young and then switch their investments to bonds and possibly cash in the period as you approach retirement. This is because the market price of equities is volatile relative to the cost of annuities at retirement whereas bond funds are less so. What can I expect from a Lifestyle fund? The market value of the fund will be volatile (i.e. it will change from day to day) while you are more than 5 or 10 years from retirement as the fund invests in equities. As you approach retirement the fund will be less volatile allowing you to plan your retirement easier and slowly securing your retirement income. You may sell these investments at a lower price than you paid for them. The returns expected from the fund will be somewhere between the returns available on equities and the returns available on bonds. Who are they suitable for? - These investments may suit those with an appetite for some risk who are comfortable to take the risk of equity investment while they are young and have the fund automatically switch them to more secure investments closer to retirement.

Cash (or Money Market) funds

What are "Cash funds"? - Cash funds invest in cash, i.e. very much like putting your money in the bank. They will invest in very short money market investments whose returns will be similar to the Bank of England's base rate. What can I expect from a Cash fund? The market value of the fund will be steadily increasing and the capital is completely safe. This fund is expected to only ever go up in value. The returns expected from the fund will be below all the the funds considered above. i.e. the price you pay for complete capital security is that returns are expected to be lower than on all the other investments considered. Who are they suitable for? - These investments may suit those with no appetite for risk (although the risk you have a poor fund at retirement would be high) in terms of their capital or those close to retirement who are expecting to take a cash lump sum at retirement. This list of different types of fund is not definitive but covers much of what is available to most. If you have a fund which does not seem to fit into any of the above categories then let us know and we may expand the guide to include it.