Investing for Growth: So you want steady returns. Join the club

Last year the FT-SE 100 index grew by 26 per cent, despite the semi-crash, or correction, in November. In fact the market remains below the peak it reached in October last year, which shows how well the stock market was performing before then.

The growth figure shows that those investing in stocks and shares would have done better in 1997 than anyone who kept their savings in a building society or bank account, where they would have been lucky to get a net return of 5 per cent.

But before making the mistake of chasing these stock market returns, consider this. If your cash had been invested in the wrong shares in 1997, you would not be sitting on such healthy growth, and may even have seen a deficit over the year. "About six companies were responsible for the great bulk of the 26 per cent rise, so if you chose your own individual companies to invest in last year you could have easily lost money, let alone under-performed," points out the Chislehurst-based independent financial adviser Brian Dennehy.

This neatly demonstrates the risks presented by equity investment, and explains why many choose to seek growth through collective investments, spreading the risks by investing in a number of different companies' shares, rather than just one.

There are three main types of collective investments: unit trusts, investment trusts, and open-ended investment companies (Oeics). They pool money from many investors to create big funds that can then be spread among a large number different shares, so if one share falls in price, the overall value of the fund is hardly affected. Collective funds also offer access to professional investment management.

Unit trusts, investment trusts and Oeics are different to each other. A unit trust is a fund split into equal units that can be bought and sold. The price fluctuates with the value of the fund. If it is performing well, the unit price will be higher, and vice versa. There are 22 categories of unit trust, with around 1,700 funds, but growth seekers can pick from UK Growth, International Growth or most of the other sectors to find a suitable fund for their investment purpose.

An investment trust is a company in which anyone can buy and sell shares. The cash raised from the sale of shares is used to invest in other companies. There are 335 investment trust companies in the UK, grouped in 24 different sectors. Growth seekers again have their own UK and International sectors.

Unlike unit trusts, investment trust share prices are not directly linked to performance. Because they are bought and sold, prices fluctuate according to the demand for the individual trust.

Oeics are a recent innovation. They have been introduced to remove some of the complexities of collective investment and allow British fund managers to offer investment vehicles similar to the funds available in the rest of Europe. They offer shares, like investment trusts, but are open-ended, like unit trusts. This means that they can alter the number of shares they issue to match demand. Consequently, the share price, which is the same for buying and selling, is based directly on the value of the fund, rather than bending with market sentiment as happens with investment trusts.

Oeics are seen as the future of collective investment as they are said to be more flexible and simpler to understand than either of their rivals. As yet, few investment houses have taken up the Oeic challenge, so those seeking growth through collective investment are likely to be offered one of the more traditional funds.

Picking the right growth fund can prove a hard task. Brian Dennehy suggests seeking out a good international investment trust, with a good pedigree and past performance. He tips two, Scottish Mortgage and Witan. "Buying either at the moment will mean you are also buying with the price at a 14 per cent discount to net assets. This contrasts with unit trusts, which you only ever buy at their asset value." By this, Mr Dennehy means that market sentiment has driven the price of these trusts well below their actual worth. So in effect you can buy them at less than the cost of the underlying investments.

"The investment trusts have other attractions," says Mr Dennehy. "Though both are more than 50 per cent invested in the UK, they are also free to cherry-pick the best investments internationally. Also, both funds have consistently outperformed their benchmarks over one, three and five years."

The worry with any kind of equity investment is that a plunge in the market can wipe out your savings. Mr Dennehy says that both the Scottish Mortgage and Witan investment trusts offer comfort in that they have a long history, dating back to 1901. "They've been ravaged by every bear market this century, and are still providing consistent capital growth for investors," he says.

Contact AUTIF (0171-831 0898) for information about investing in unit trusts and Oeics, and the AITC (0171-588 5347) about investment trust companies.