What happens when you invest? Often you will purchase an ‘investment fund’ which consist of a blend of different ‘assets’, which include:
The majority of funds will invest in cash and non-cash assets. Why? Because variation can help manage your risks so that although one kind of asset may be losing value, another one can be making gains.
- Cash is the most stable investment option, but your returns can often be lower than the rate of inflation.
- Property is typically an investment in commercial properties such as office buildings, warehouses or shopping centres. In general, property is less risky than shares, but it can go through periods of fairly large losses. Commercial property, house purchases for example, can take a significant length of time to be bought and sold. This can mean that you need to wait before you can get your money out of a property fund. In addition, property valuations are determined by independent property experts. They are based on opinion rather than fact; given you only really know the value of a property when it’s sold.
- Bonds include corporate and government bonds. With bonds, an investor loans money to a company or government. Barring default, the loan is repaid in full along with interest. These are generally considered relatively low risk investments.
- Shares are investments made into UK companies and ones abroad. In general, shares are the riskiest of the four main kinds of assets as stock markets can have long periods of losses. But they can also offer the potential for large gains.
The following types of investment funds are available to you:
- Stocks & Shares ISAs
Think of a stocks and shares ISA as a ‘wrapper’ that can be put around most investment funds to help save you tax. If you place your investment inside an ISA you won’t have any personal tax to pay on any capital gains or income you receive. Stocks and shares ISAs are often sold and marketed as products in their own right.
- Pension Funds
Visit our section on pensions to find out more
- General Investment Accounts (Unit Trusts)
A unit trust is an investment fund that is set up using trust law. When you invest in a unit trust, you get a specified number of units. The fund manager will set up a unit trust that is separate from his or her company and will appoint an independent financial institution, such as a bank, to act as the trustee. The trustee looks after the assets that the fund is invested in and monitors the fund manager.
- Insurance Company Funds
Life insurance companies run investment company funds. When you invest through an insurance, such as an investment bond, or a pension product, you can choose how your money is invested. The choice might include the insurance company’s own funds or investment funds that are run by other managers.