Investing 101: What Are Trusts, Funds and Indexes?

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Investing 101: What Are Trusts, Funds and Indexes?Investing can be a great way to grow your savings, complement your income and help you prepare for retirement. Still, the complexity of the markets makes it difficult for experts to predict how any individual stock will behave — amateur investors tend to be working in the dark! If your money is invested in just a few stocks, a downturn or some bad luck could unfortunately cause you to lose your money. Meanwhile, creating your own diversified portfolio can take immense amounts of research and management.

There are a range of investment tools that can help solve this problem, making it easier for individuals to invest in the markets in a diversified manner. Though these also carry risks — the market can always go down and companies can always fail — they can be good choices for individuals looking to grow their money. Below, we’ve collected several of the most common ways to invest your money.

 

Unit Trusts and Open-Ended Investment Companies

Unit trusts and open-ended investment companies (OEICs) are ways for individuals to easily invest in a strategically chosen range of stocks. An investor buys shares or units of the OEIC or unit trust, giving their money to the organization to invest. The OEIC or unit trust then takes the money they’ve collected from everyone who buys in, and uses it to make informed investments in the market.

Different trusts and OEICs will invest in different stocks, depending on whether their investors want safe growth, or the potential for higher returns with a higher risk of losses. Any profits can be returned to the individual investors or reinvested, depending on trust or fund. These companies and funds may also charge fees for management expenses and actions like buying or selling shares or units.1

 

Investment Trusts

Investment trusts are similar to unit trusts and OEICs with a few major differences. First, they are publically traded companies with a limited number of shares. This means that they themselves are tracked on the stock market. It also means that it can be potentially difficult to buy or sell shares in an investment trust: There have to be individuals willing to sell their shares or buy yours.

The second difference is that investment trusts have wider latitude when it comes to borrowing money. This can be a plus or a minus to their shareholders. Since the fund can borrow more money to work with, it can potentially make better investments, getting higher returns for its shareholders. On the other hand, that borrowing exposes them to more risk, increasing the possibility that shareholders lose money.

Like unit funds and OEICs, investment funds often charge annual management fees.2

 

Tracker Funds and Exchange-Traded Funds

Tracker funds and exchange-traded funds (ETFs) are similar to the trusts and companies discussed above with some important differences. Instead of investing your money in a strategically chosen range of stocks, tracker funds and ETFs invest your money according to an index. And what is an index? Indexes are very broad groupings of similar stocks or commodities. Well-known indexes include the FTSE 100 — the 100 largest companies on the London Stock Exchange — and the Dow Jones Industrial Average — 30 of the largest companies trading on the New York Stock Exchange.

A tracker fund will either invest your money in every stock in the index or — in the case of a larger index — in a selection of stocks whose performance has historically mirrored that of the index as a whole.3

ETFs are slightly different. Though they can also track traditional indexes, they themselves are tradable stocks. Much like with investment trusts, this can allow them to be more flexible and riskier — trading in unpredictable commodities like oil, for instance. This increases the possible return, but also the possibility of losses.4

Because they are passive — i.e. not requiring active management — index funds tend to have lower management fees than trusts, often making them more affordable. And since they tend to track large collections of stocks or even whole markets, they can be more stable than many funds. This advantage is also their weakness: There is little opportunity to take risks, which lessens the chance of a large return.3

Ultimately, how you invest your money depends on what you want. Are you looking for a safe investment that will reliably grow your money over a long period? Or are you looking for the chance to make a large return, with the risk that you may lose some of your investment? Whatever your goals, there are likely types of investments that are a good fit for you!

For more information on investing, savings and other financial matters, be sure to contact your financial advisor and check out the articles on the Money Advice Service.

References

1Money Advice Service. Unit trusts and open-ended investment companies (OEICs). (n.d.) Retrieved 9 September 2015 from http://bit.ly/1gpicyY

2Money Advice Service. Investment trusts. (n.d.). Retrieved 9 September 2015 from http://bit.ly/1OcYHbx

3Money Advice Service. Tracker funds and exchange traded funds. (n.d.). Retrieved 9 September 2015 from http://bit.ly/1KQI5Gn

4Which? Understanding tracker funds and ETFs. (n.d.). Retrieved 9 September 2015 from http://bit.ly/1itxIfg

Eddie Rybarski

About 

Eddie Rybarski is a copywriter for Enova International. He enjoys writing about personal and business finance and his work has appeared on SmallBizDaily.com.

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The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.