Before choosing an investment, it’s worth identifying which investment options work best for you.
Investment products pool together different amounts of money from multiple individuals to make investments in the market. The goal is to increase the value of the investment and then share the rewards between the investors.
Investment products are broadly split according to how they operate.
A passive investment fund, known as an Exchange TradedFund or ETF, simply tracks a market,and is the cheapest way to invest. There’s no human decision in what the fund buys; it simply selects every asset within a specific market, meaning it won’t discriminate against good and bad investments, it will simply hold on to both.
Active investments products are managed by a professional fund manager, who will only select and buy shares in companies they deem to be particularly good investments. If conditions change, either with the individual companies or the wider economy, and these investment become less attractive, they may sell them and buy others. This responsive oversight means active funds generally incur higher fees, but with experienced fund managers comes the chance to outperform the overall market.
Within actively managed investment products there are two distinct types.
- Investment funds and
- Investment trusts
They mostly operate in the same way - by pooling together investors’ money to make investments - but there are a few key differences.
Aside from investment funds growing and shrinking much faster than investment trusts due to the way they raise money, investment trusts have three additional key features.
They have an independent board which will scrutinise all of the fund manager’s investments and offer strategic support where necessary.
They can borrow money, known as gearing, to make extra investments to boost returns, but these will also enhance loses in falling markets.
And they have a revenue reserve so that during the good years, when dividend returns a replentiful, they can set aside some money to top-up income paid out to investors in less successful periods.