Funds
Now you understand the basics you might be thinking ‘choosing shares is not for me’ or ‘I simply don’t have enough money or time for it to work for me’. That is where funds come in. A fund is a collective investment; your money is added to the money of other investors, the total invested by a fund manager. The fund manager will invest in a wide variety of asset type, shares, gilts, bonds, cash, depending on the funds objectives and sector designation, for example if you choose a European fund the fund manager will only invest in “EU-based companies”.
Types of Funds
Unit Trusts – OEICs
Both Unit Trusts and OEICs (Open ended investment companies) are open-ended investments, with OEICs generally replacing the older unit trust from 1997 onwards and both can be held individually, as trustees or as part of an Individual Saving Accounts (ISA). Open-ended investments allow the investors to freely buy and sell shares in the fund, the fund grows or shrinks in response, however there are some differences.
With a Unit Trust there is a buy price and a sell price, the difference between the two is known as the bid-offer spread, OEICs have a single price which is directly linked to the value of the funds underlying investments hence no bid-offer spread.
OEICs allow the investor to dictate the way their investment is made via a set of sub-funds
OEICs the ownership of OEICs is much clearer than Unit trusts. Unit trusts allow an investor to benefit from the assets of a trust without actually owning that asset. With OEICs you simply own shares in an investment company, this is the main reason for the conversion of unit trust to OEICs.
Both Unit Trust and OEICs can be used in an ISA which provides tax advantages.
ISA
ISAs or Individual Saving Account are tax-free savings accounts. There are two types of ISAs, stocks and shares ISAs and Cash ISAs. Stocks and Shares ISAs invest in all of the types of investments we have discussed above, so your capital is not guaranteed, in fact to qualify there must be a chance of losing at least 5% of the investment. With Cash ISAs your capital is guaranteed and cash ISAs can be thought of as simply a tax free savings account.
The tax free saving can make a substantial difference to your return, from 20%-45% depending on your income - that's the income tax rates so £1 of dividend in an ISA would be 90p to a basic rate tax payer, 60p to a 40% taxpayer or 55p to an additional rate tax payer 'outside' of an ISA.
The amount you can invest in an ISA is capped, currently at £20,000.
Junior ISAs (JISA)
On 1st of November 2011 the government introduced Junior ISAs (JISA). Junior ISAs are designed to allow children to save in a tax-free fashion. Once the child reaches the age of 18 the JISA converts to an ISA.
The tax-free limit of a JISA is less than an ISA, currently this is set at £4,260 in total across equity and cash investments.