Types of investment

Equities

Equity funds primarily invest in stocks and shares (company shares). The fund, as a shareholder, participates in the profits of the companies it invests in and, if the value of the companies go up, the value of the fund will go up. But, if the value of the companies goes down, so does the value of the fund. An equity fund can be spread across many countries and company types; it can concentrate on one geographic area (such as the UK, Asia, Europe or the US), or even a particular sector.

Multi-asset funds

Multi-asset funds invest in a mix of UK and global equities, investment bonds, cash and other assets, such as commercial property and commodities (copper, coffee or wheat). Given the diversity in assets, a multi-asset fund seeks to offer more stability than a fund of pure equities but, as a result, may reduce the potential for higher rate returns. The extent to which a multi-asset fund goes up and down in value usually depends on the proportion invested in higher risk investments like equities.

Commercial property funds

Most people think of property funds as investing in bricks and mortar (direct property), but there are also funds that invest in property shares or Real Estate Investment Trusts (REITs). Both types have different risk and return profiles and can be useful as part of a portfolio as they do behave differently from other types of fund, meaning they can increase in value when other types of asset are falling. This is particularly true of direct property funds.

Direct property funds generally invest in commercial property and returns come from a mixture of rental income and increase in property values in a similar way to residential property. Because of the relatively steady nature of rental income coming into the fund, they have tended to be less volatile (fewer ups and downs) than equities for instance, but there are also risks unique to this asset class.

These include:

  • loss of income when properties are vacant;
  • less liquidity meaning you may not be able to cash in your investment when you want to, as it may depend on the ability of the fund manager to sell properties at a fair price, and
  • valuations can fluctuate and are usually a matter of the valuer’s opinion and not fact.

For these reasons, commercial property funds are best used as long-term investments and as part of a portfolio.

Bond funds

Bond funds effectively make loans to companies, governments or local authorities, typically for a known period (or term). These investments generally pay interest to the lender and the loan is repaid at the end of the term.

There are many other names for this type of investment, for example:

  • fixed interest securities;
  • gilts (loans to governments), and
  • corporate bonds (loans to companies).

The main benefit of these investments is that the fund normally receives a regular, stable income. The fund value can go down as well as up, depending on market circumstances.

There's still a risk that the issuer of the bond can default and not pay back the original loan at the end of the term, in which case you would lose your capital. 

Cash funds

When most people think of savings, they think of cash - a deposit account in a bank or a building society. But, over the long term, cash savings can struggle to beat inflation.

Over longer periods, cash has typically given lower returns than equities or bonds. Cash is generally seen as the safe option as, when you invest in cash, you do get interest. However, if the interest rate you receive is less than the inflation rate, then the real value (the spending power) of your money is actually going down. This is true of any investment where growth fails to exceed the rate of inflation.

Cash funds can also be invested in money market instruments, these are short-term investments paying a known income and which are readily saleable. These usually pay a slightly higher rate of interest, which is fixed for a short time, normally a few weeks or months. You should also be aware that the value of cash on deposit – or invested in money securities – could be affected if the institutions it’s invested with become insolvent or have other financial difficulties.

So, why would you ever choose to invest in cash? The main reason might be to shelter investments in the short term, particularly if you may require quick access to savings – although this may not protect you against falls in annuity rates as you approach retirement.

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