Investment funds, in contrast, help investors to diversify their money while providing access to the stock market. Funds do this by investing in a basket of companies chosen on your behalf by a professional portfolio manager.
Contributions are pooled from potentially thousands of investors, with the proceeds managed according to strict investment mandates, each with a particular target. This might include aiming to outperform a benchmark stock market index, such as the FT-SE 100 index of leading UK companies, by a specified amount each year: 1%, say.
Funds invest in a range of assets – from cash and bonds, to property and equities (both domestic and international) – each with varying risk profiles. Note that ‘equities’ is an interchangeable term for ‘stocks and shares’.
There are different types of investment fund, including: Exchange-Traded Commodity (ETC); Open Ended Investment Company (OEIC); Société d’Investissement à Capital Variable (SICAV); and Unit Trust.
Each name refers to the way a fund is put together and how it works from day to day. However, the overall idea of pooling money contributions of multiple investors holds true for each type.