Investing for growth: Collective but different

TO MANY investors, chasing growth means taking high risks. But the dangers can be reduced by using a form of pooled or collective investment.

There are currently three main types of collective investment: unit trusts, investment trusts and open-ended investment companies, known as Oeics. In some respects, they all offer the same - the chance to spread risk by investing in a portfolio consisting of a collection of shares in different companies, rather than just one or two. The benefit of doing this is that if one share drops in price, it will only have a small overall effect on the rest of the portfolio.

Collective funds also offer small investors access to the kind of professional investment management they might not be able to afford as individuals.

But unit trusts, investment trusts and Oeics are different animals and you should understand their nature before buying. Both investment trusts and unit trusts have long histories. The Oeic only appeared in 1997 and is a cross between its two older cousins.

A unit trust is a fund split into equal-sized units that can be bought and sold. The unit price is directly linked to the value of the underlying investments: if the fund is performing well, the unit price will be higher, and vice versa. There are 22 different unit trust categories with around 1,700 individual funds.

An investment trust is a company whose shares are quoted on the Stock Exchange. Anyone can buy and sell these shares. The money raised from the sale of shares when they are first listed on the stock market is used to invest in other companies. There are more than 330 investment trust companies in the UK grouped in 24 different sectors.

Unlike unit trusts the price of investment trust shares is not wholly linked to the performance of the underlying investments. As with any traded asset, supply and demand will have a potentially strong influence on the price of the shares, as will market sentiment. Investment trust shares, therefore, will tend to fluctuate in price around the value of the underlying assets (called net asset value or NAV), and are said to be at a discount or premium to NAV.

Oeics offer shares, like investment trusts, but are open-ended, like unit trusts. This means they alter the number of shares in issue to match demand and the share price is based directly on the value of the fund. Furthermore, unlike their rivals, they will have just one price, with no potentially confusing difference between the price you pay for buying and selling.

Oeics are seen as the future of collective investment since they are regarded as more flexible and easier to understand than either unit trusts or investment trusts. As yet, only a handful of investment houses have issued Oeics. So those seeking growth are more likely to be offered one of the traditional fund types.

Picking a suitable growth fund may well seem difficult. Taking professional advice should help as will a consideration of past performance.

An investment of pounds 1,000 10 years ago would have realised pounds 3,989 in the best performing unit trust in the UK Growth sector. But choosing the top performing fund in the UK Equity Income sector over the same period would have yielded pounds 4,472. Those investors prepared to risk their money abroad might have done better. The top performing fund in the International Growth sector would have realised pounds 7,272. Those prepared to risk their money in a highly volatile US smaller companies fund would have seen the value of their investment grow to pounds 9,986.

Your age should be a determining factor in what kind of fund you choose, says Matthew Orr, at stockbrokers Killik & Co: "Younger investors can take a higher risk. As they move towards middle age and retirement is on the horizon, they should become more of a medium-risk person. When they reach retirement age they want a blue-chip investment. Where you are in your life cycle will decide the sort of risk you can take."

q Contacts: Autif (0171-831 0898) for information about unit trusts and Oeics; and the AITC (0171-588 5347) about investment trusts.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Solvency II Project Manager - 10 month contract - £800 p/d

£800 per day: Ashdown Group: A highly successful, global financial services co...

SThree: Trainee Recruitment Consulant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...

Guru Careers: Financial Controller

£45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Day In a Page

Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Attwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works
Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

Twitter accused of 'Facebookisation'

Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

Jane Birkin asks Hermès to rename bag

The star was shocked by a Peta investigation into the exotic skins trade
10 best waterproof mascaras

Whatever the weather: 10 best waterproof mascaras

We found lash-enhancing beauties that won’t budge no matter what you throw at them
Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

Diego Costa: I go to war. You come with me...

Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
Ashes 2015: England show the mettle to strike back hard in third Test

England show the mettle to strike back hard in third Test

The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

Charley Hull: 'I know I'm a good golfer but I'm also just a person'

British teen keeps her feet on ground ahead of Women's Open
Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'