Pooled funds that offer various investment strategies to choose from
Investment funds, also called ‘collective investment schemes’, are often large pools of capital created by garnering small investments from many individuals. This fund is then managed by a professional or a team of professionals who decide on the assets to invest in.
Pooling your resources with other investors allows you to be part of an individual investment scale that would be otherwise unreachable. These pooled funds offer various investment strategies – from high-income and capital growth to a mix of income and growth.
Delving into Unit Trusts and Open-Ended Investment Companies
Unit trusts and Open-Ended Investment Companies (OEICs) are examples of professionally managed collective investment funds. These funds pool money from various investors to purchase multiple assets such as equities, bonds, property, cash assets, and more. They are a robust foundation for individual investors seeking to achieve their financial goals.
Understanding the underlying assets
When you invest in an OEIC, you buy shares; when you invest in a unit trust, you buy units. The fund manager uses your and other investors’ money to invest in the fund’s underlying assets. Each fund invests in a unique blend of investments. Some might focus on shares in British companies, while others might invest in bonds, foreign company shares, or other investments.
The dynamics of buying and selling
As an investor, you own a fraction of the overall unit trust or OEIC. If the value of the underlying assets in the fund increases, so does the value of your units or shares. Conversely, if the value of the underlying assets decreases, the value of your units or shares follows suit. The total size of the fund fluctuates as investors buy or sell.
Certain funds offer ‘income units’ or ‘income shares’ that make regular payouts of any dividends or interest earned by the fund. Alternatively, there are ‘accumulation units’ or ‘accumulation shares’, where earnings are automatically reinvested in the fund.
The potential for high returns
Investments come with their share of risks and rewards. While the value of your investments can decrease, there is also the potential for high returns. Some assets are riskier than others, but they also offer the potential for higher returns. It’s crucial to understand the kind of assets the fund invests in and whether they align with your investment goals, financial situation, and risk tolerance before you invest.
Mitigating risk through diversification
Unit trusts and OEICs enable you to diversify your investments across a wide range of assets without a significant capital outlay. Most unit trusts and OEICs allow you to sell your shares or units anytime. However, some funds may only deal on a monthly, quarterly, or twice-yearly basis, especially if they invest in assets like property, which may take longer to sell.
Deciding on the length of investment
The duration of your investment should align with your financial goals and the nature of the assets your fund invests in. If your fund invests in shares, bonds, or property, consider investing for at least five years. Money market funds, on the other hand, may be suitable for shorter time frames.
If you own shares, you earn income in the form of dividends, a portion of the profits made by the company you invested in.