Investment Funds

Plus Points: Your investment decisions are delegated to a specialist. Investment funds enable you to spread your investment risk at lower amounts of investment and pooling reduces the dealing costs as a result of the higher negotiating power of the fund manager.

Points to Watch: You lose control of your investment decisions and you will not own the underlying investments directly. You will not therefore be able to vote shares or receive other rights associated with the underlying investments. There will be fund management and administrative charges taken out of the fund.

UK fund products fall into two broad categories, 'Insurance-Linked' and 'Other'. There is often a confusing overlap between the two. Insurance-Linked products use part of the savings to buy life insurance, leaving a lower amount to be used for investment. Insurance cover, and hence added security, may therefore be provided at the cost of reduced expected investment returns. Some products carry only a very small amount of insurance cover making this trade-off minimal.

The major forms of Insurance-Linked Savings product are Whole of Life Policies, Endowment Policies and Annuities.

The other category of investment fund covers Authorised Unit Trusts ("AUT's"), Approved Investment Trusts ("AIT's") and Open Ended Investment Companies ("OEIC's").

Tips: Insurance-Linked Savings products may be suitable if you will need to withdraw income from the fund over its life. A so-called With-Profit life insurance policy may be a suitable alternative to a higher rate deposit savings account. AUT's, AIT's and OEIC's are likely to be better alternatives for savings invested for capital growth.

It may not always be best to buy direct from the provider and "cut out the middle man". In some cases the cost of acquisition may be reduced by buying from so-called 'discount brokers' who may rebate some of the 'initial fee' that you would otherwise be charged by the fund. Also, some providers only make their products available via suitably qualified financial advisors.

Tax Tips: Authorised Unit Trusts, Approved Investment Trusts and OEIC's can be bought and sold to use your capital gains tax annual allowances. It is possible to shelter inheritance tax for your dependants with Insurance products.

Visit the 'AUT's, AIT's and OEIC's' and 'Insurance-Linked Savings' pages to get further information about the different types of fund products.

For guidance on what to think about when choosing an investment fund, click on Choosing a Fund.