Choosing a fund

As there are so many thousands of different funds, it can be hard to find the right one. Most people seek guidance from independent financial advisers but it is worth bearing four factors in mind: the stated aim of the fund; what it is investing in; the track record of the fund manager and the fees and charges associated with the fund. It is also important to remember that past performance is no guarantee of future performance. 

• Unit trusts

Unit trusts are pooled investment funds, which are divided into units. Managed by fund managers, the investments are held in a trust fund, where the trustee is a financial institution, such as a bank or insurance company, authorised by the FSA.

Investors in these funds receive a given number of units and the more investors there are in a unit trust, the more units are created. When units are sold, they may be cancelled, if the fund manager cannot find a buyer for them. The price of a unit trust varies according to the value of the assets it owns so the price of the units reflects the value of the underlying assets in the fund.

Unit trusts are known as open-ended funds because their size is not restricted. They can become bigger if lots of investors choose to buy into them or smaller if investors sell out and are not replaced with other investors. There are thousands of unit trusts in the UK but they have now been superceded by OEICs.

• Mutual funds

This the US term for pooled investment funds. They are also known as collective funds.

• OEICs

An OIEC (pronounced ‘oik’) is an open-ended investment company, which is similar to a unit trust. Like unit trusts, OIECs are pooled investment vehicles, which invest in a range of different shares. OEICs also expand and contract in response to demand, so the fund grows and more shares are created as more people invest. Conversely, the fund will shrink as investors withdraw their money. The price of an OEIC is the value of all the underlying investments, divided by the number of shares in issue. OEICs have a simpler structure than unit trusts and investors buy shares in an OIEC, rather than units