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.