Authorised Unit Trusts, Approved Investment Trusts and OEICs

Managed Funds - Most are actively managed by the fund manager who has discretion to buy and sell investments for best advantage. The managers aim to beat the fund's so-called "benchmark" index but surprisingly few achieve it. It is important to choose your managed funds carefully.

'Cash' or 'Money Market' Funds -These invest mainly in deposits and other similar investments and are low-risk investments with comparatively low expected returns.

'Bond' or 'Fixed Income' Funds - These invest mainly in Gilts, Corporate Bonds and/or similar stocks. They are normally low to medium-risk and are usually aimed at providing income rather than growth. High Yield Bond Funds are often in the high-risk category.

'Balanced' or 'General' Funds- These can invest in a wide range of investments to spread risk. and are normally suitable for a medium-risk investment. They can be aimed at providing income, growth or both.

'Tracker' or 'Index' Funds - These create a portfolio that moves in line with an index such as the FTSE 100 Index. These are not actively managed as the fund merely follows a pre-determined course. The risk level will depend upon which index the fund tracks. Funds that track the larger indices will be medium-risk, others such as small company index trackers or specialist sector index trackers will be higher risk. The elimination of a fund manager reduces the cost of running the fund so charges are usually lower. Investing in Tracker funds eliminates the risk of picking the wrong fund manager.

Specialist Funds - These invest in particular sectors and tend to be higher risk investments.

Ethical Funds- These can be general or specialist funds, but certain investments are excluded whilst others are preferred on ethical grounds.

Fund of Funds - These are funds that invest entirely in other funds.

Income Funds - Normally of low to medium risk the aim is to generate income rather than capital.

Growth Funds - Aimed at maximum growth not income and range from low to high-risk.

Income and Growth Funds - Seek a balance between income and growth. Tend to be medium-risk.

Offshore Funds - These are funds managed by offshore managers. They are often structured for tax purposes and it is wise to be well advised before investing in these products.

Guaranteed Stock Market Funds - Funds that invest in the stock market but offer protection against market falls. The cost of the protection reduces the funds' investment resources and limits the potential for gain when stock markets rise.

Point to Watch: Funds may diversify by investing in overseas markets. This adds the risk of currency fluctuation and you may wish to look at the fund's strategy for dealing with this risk. Labels such as Japanese, European, Global or Emerging Markets will indicate that the fund will invest overseas.

Types of vehicle

You buy investment funds in various forms:-

Authorised Unit Trusts ("AUT's") - The investment fund is divided into units that are bought from the fund manager on investment and cancelled and returned to the manager at the end of the investment. The price you buy at will be higher than the price at which you can sell. This difference is known as the "spread" and amounts to an additional charge to the investor. Some Unit Trusts are not 'authorised' and have tax disadvantages compared to authorised unit trusts for UK investors.

Open Ended Investment Companies ("OEIC's") - An OEIC is a company that grows as new investors are added. Investors buy shares at a price based on the value of the investments that the OEIC holds. The shares have one price for sale and purchase and the manager quotes a separate fee that makes the manager's charges clearer.

Exchange Traded Funds ("ETF's") - An ETF is a 'tracker fund' that is set up as an open ended company and whose shares are traded on the London Stock Exchange. ETF's tend to have comparatively low management charges.

Approved Investment Trusts ("AIT's") - Despite the name, an AIT is a company whose shares can be bought and sold on the London Stock Exchange. Unlike OEIC's and Unit Trusts, Investment Trusts are not open ended (i.e. there are only a limited number of shares in issue and shares cannot merely be cancelled but have to be sold to another willing buyer). The price of AIT's shares may be more influenced by factors other than the value of the investments it holds.

ISAs- Many fund products are offered in the form of ISAs making returns tax-free. For information about ISAs, visit the 'ISA' page.

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

An alternative UK fund product to AUT's, AIT's and OEIC's is the range of Insurance-Linked Savings products. For information on these, visit the 'Insurance-Linked Savings' page.

Insurance-Linked Savings products are complex. If in doubt, click below to speak to an Independent Financial Advisor free of charge.