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Investment funds

What is an investment fund?

This is an investment vehicles that allow you to indirectly invest in shares or bonds. It pools money from a collection of investors and then invests that sum in financial instruments. This is handled by a professional fund manager. Every investment fund issues units, which have a certain value just like a share. When you invest, you become a unit-holder. When the instruments that the fund invests perform positively, as a unit-holder, you will benefit. This is either through a rise in the value of the units or through the distribution of dividends to all unit-holders, or a combination of both. Most investment funds reinvest the dividend or income and therefore gains are made through appreciation of unit price.

What is the difference between unit trusts and Open-Ended Investment Companies (OEICs)?

Unit trusts and open-ended investment companies (OEICs) are types of collective investment, which allow investors to pool their money with other investors to invest more efficiently in stock and bond markets. The main difference between them is their legal structure. Unit trusts are established as trusts and will issue units to investors, while OEICs are incorporated as a company and will issue shares. The value of the units in the case of a unit trust or shares in the case of an OEIC will then rise or fall based on the value of the underlying assets the fund holds. Both have independent parties who oversee their conduct; for unit trusts this is a Trustee and for OEICs it is a depository.

Traditionally OEICs have a single price which is the same for both buying and selling, while unit trusts normally have a buy price known as the offer price and a sell price know as the bid price. The offer price will be higher than the bid price and the difference reflects the initial charge for investing as well as the difference in cost between selling and buying the underlying assets the fund invests in. With OEICs you pay this initial charge separately.

Why should I invest in investment funds?

With our daily commitments, be it work or family, finding time to make personal investment decisions on a regular basis is not possible for most individuals. The use of investment funds allow individuals to benefit from a qualified investment professionals ability to continuously monitor the market and find promising investment opportunities for you. Investment funds minimise risk by creating a diversified portfolio while providing the necessary liquidity.

What are the benefits of investing in funds?

Professional investment management : the use of investment funds allow individuals to benefit from a qualified investment professionals ability to continuously monitor the market and find promising investment opportunities for you. The managers and their teams have access to specialist research and analysis that is used to make investment decisions.

Diversification : investment funds invest in a broad range of assets, which may include a number of companies, bonds or commodities depending upon the fund objective. Most funds have access to a minimum of 20 different securities. This helps to lower investment risk. For example, if one of the fund’s holdings is not performing positively, the overall fund could still generate positive returns.

Economies of scale: the fund manager has the ability to buy assets which investors individually could not afford. The fund manager, by virtue of being able to place large orders, has greater purchasing power to negotiate the best possible terms when buying assets. Fund managers buy and sell investments in large quantities and any associated costs are shared by all the investors in the fund.

Access to foreign markets: fund managers are able to access shares on foreign stocks markets which may not be accessible to individual investors.

How do I choose a suitable investment fund(s)?

It is reasonable that you should, at the very beginning, identify your own financial goals, be it planning for children's education or retirement life. After defining the financial goals, you need to plan for them in an organised manner and look at investments that help achieve these goals. Investment funds vary in their investment objectives, thus providing you with the flexibility to create an investment plan based on your individual financial goals. In general, growth investments such as equity funds and stocks may be a good choice for funding needs that are five years or more away, income funds to meet medium-term needs and liquid funds for short-term requirements.

What is the difference between income and accumulations units/shares?

Many funds offer investors a choice of either income or accumulation units The income units pay out any income generated by the fund (such as dividends from shares or coupons from bonds), Accumulation units/shares will instead increase in value if income is generated from the holdings as the income is kept within the fund.

What is a Key Investor Information Document (KIID)?

Each fund will have a Key Investor Information Document (KIID). This is a brief document which tells you about the key features and risks of the fund or ETF that you are investing into.

Do investment funds provide guaranteed return?

No, investment funds do not give any guarantees on the returns. In general, such investments may be suitable for those investing to meet long term investment needs (5 years+) and moreover have the ability and capacity for associated risks. However, suitability of investing in funds will depend on your personal circumstances and needs.

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