An investment fund is a product classed as collective investment as it allows investors to either directly invest in the shares of a company or in other kinds of investments.
The term collective investment comes from the fact that the money of investors is effectively put into a pool with that which has been invested by others and then invested on behalf of all of them by a fund manager who is an expert in this field. There are several different kinds of investment funds that an investor can use in order to accumulate their wealth.
A few examples of the different kinds of investments funds around are equity funds, cash funds, bond funds and currency funds. These are most common types as they are the most easily understood by the novice investor and while they may not yield outstanding wealth, they bring in enough to satisfy their investors. They also are bereft of many of the complexities involved in investing thus making them ideal for both first time investors and those who do not have the confidence to make direct investments.
How These Funds Work
Investment funds take all the funds that have been put in by a pool of investors and then places the money into specific investments. This then gives an investment company the ability to access a much wider range of securities than they would otherwise. Individual investors also benefit from the fact that they aren't hindered by any large trading costs due to the company being able to make economies in their scales of operation.
Combinations of Funds
Many individuals opt for a combination of different funds which allows them to build up a diverse portfolio which is turn reduces the risks. The differences in the type of funds they select means that the bolder investor can invest in the higher risk equity funds by effectively covering their back by also investing in the lower risk cash and bond funds.
Size of Investment
Most investment funds have a minimum investment of a £1,000 lump sum, with investors also having the option of investing on a monthly basis of at least £50. Once you have made your initial investment you are free at any time to start or stop the monthly payment plan, although if you can afford it most advisers will tell you that are you are best off keeping it going.
Pros and Cons Of Investment Funds
Unlike ISAs, which are tax efficient, any profit made from these funds could, depending on the value of the profit, be liable for Capital Gains Tax if it is transferred or sold. The good news is however that every investor receives a tax free allowance, which for 2012/13 stood at £11,280. This effectively means that if your financial gain doesn't go over this figure it won't be liable for capital gains tax.
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