A guide to investment funds

What are they?

Huge collections of investments - aka collective investments - usually shares or bonds. A fund manager tries to make as big a profit as possible by buying and selling at the right time. The manager works for an investment institution such as Fidelity or Aberdeen Asset Management. You buy units in the fund, which go up and down in value inline with the value of the whole fund.

The idea of investment funds is that you can not only spread your risk across lots of different shares - putting your money into just one type would be highly risky - but that you can also have a skilled investment manager working on your behalf.

Main types of investment fund:

• Unit trusts
• Investment trusts
• OEICs

... they're all similar but there are some technical differences.

To keep them free of tax, you can invest in investment funds within an ISA ( Individual Savings Account).

How do you choose?

There are thousands of investment funds.

• Take the advice of an IFA or broker.
• Look for tips in media you trust, such as the personal finance sections of the weekend newspapers, websites, or recommendations from a broker you believe in.
• Check out RGTM's Investment Tips page.
• Moneyfacts lists best buy unit trusts, and shows how much your money would have grown in them.

What is a tracker?

It's an investment fund that aims to mirror the movements of a particular stock market index - say the FTSE 100. Trackers are also known as passively managed funds. (As opposed to an actively managed one where the fund's manager uses their investment skills to try to beat a particular index.)

Trackers are easy to understand, and can have low charges because they're cheaper to manage. But it's a myth that trackers are safe. A tracker follows an index on its way up, but also has to follow it back down again. When the market's falling, some active funds tend to do better than trackers.

Cut fees on investment funds

When you put money into a unit trusts or OEICs, many brokers and the fund manager charge you a fee between 3% and 5%. But discount brokers and fund supermarkets will normally rebate most of this back to you, so more of your money goes into the actual investment. This is because they offer a no-frills service, so don't expect to get advice on which fund to buy into.

Also, many independent financial advisers will charge you a fee for advice instead of taking commission. In this case, they rebate the commission back to you.

There is also an annual management charge in investment funds of typically 1%-1.5%. It's less common for discount brokers to rebate this, but some do give some of it back to you.

Ethical investing

One problem with putting your money in an investment fund, is it's pretty hard to keep track of the shares you've indirectly bought. You could be part-owning a company whose activities you disapprove of, such as a weapons manufacturer or a tobacco firm.

Many people choose ethical funds. They have a set of ethical, environmental or socially responsible principles which guide the way they invest. Click on the following three to find out more about how they're run:

• Aberdeen Ethical World Fund
• Standard Life UK Ethical Fund
• Jupiter Ecology Fund

IFA firm Barchester Green specialises in ethical investment, and has a good guide to the subject on its website.

Ethical Investors Group gives advice on ethical investment; use its funds directory to find an investment that suits your principles.

The content of this article is intended for general information and personal use only. Nothing in this article should be construed as advice under the Financial Services and Markets Act 2000.

©2008 Rachel's Guide to Money