Collective investment schemes

There are two main types of collective investment scheme – unit trusts and investment trusts.

Unit trusts

Unit trusts pool funds together under one umbrella and then manage them en-masse. Investors pay into the unit trust, which then buys assets such as equities or bonds on their behalf.

The monetary value of these assets is divided by the number of units issued when the fund is created to give an initial unit value. This value then fluctuates as the underlying assets trade daily and investors put money in or take money out. As there is no limit to how many units can be created or redeemed on an ongoing basis, unit trusts are known as open-ended funds.

Investment trusts

An investment trust works along the same principle of raising money from investors to buy assets that it manages on behalf of them all. The main difference is that the investment trust is created by selling a fixed number of shares at the outset. As no new shares are created, investment trusts are known as closed-end funds.

Types of investment funds

There are a few broad categories of funds available via a unit trust and investment trust. The type of fund(s) you choose will depend on your investment goals and attitude to risk.

Equity funds invest in a range of company shares that offer capital gains when share prices rise, along with an opportunity to receive the dividends that some companies pay periodically. However, share values may fall, sometimes dramatically and dividends can be cut if companies run into cash problems.

Equity income funds specifically target the companies that pay strong dividends or have the potential to raise their pay-outs. This has proved a particularly successful strategy during a recessionary environment, as the dividends can act as a cushion against lower returns from falling share prices.

Multi-asset funds invest in a range of equities, bonds, commodities (including gold), money markets and real estate. These can be an efficient means of reducing risk by investing across a wide range of assets, so that you don’t have all your eggs in one basket.

Specialist funds target countries or sectors that require expert knowledge by their fund managers to avoid the riskiest areas of the market and to maximise returns. Many have sprung up covering emerging markets such as Asia and Latin America, to sector-based funds, such as commodities.

Absolute return funds aim to produce a positive return over time, regardless of the prevailing market conditions. The ability to produce positive returns is typically assessed on a rolling 12 month basis.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.
The figures shown on this page are fictional examples to explain the types of investments you may consider.. Past Performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.