Types of investments

Investors have a wide range of investment products to choose from, each with their own benefits and drawbacks. Here we look at the main types of investments available and what to expect from them.

Investment products

You can invest directly in investments, like shares, but a more popular way to invest in them is indirectly through an investment fund. This is where your money is pooled with other investors and spread across a variety of different investments, helping to reduce risk. There are many different ways to access investment funds, such as through  Individual Savings Accounts (ISAs) and workplace pensions.

The table below briefly describes the most popular ways to invest your money.

Also, look at the note below the table on how the level of fees charged might impact any potential return you receive.

Investment products (indirect i.e. products through which investment funds can be accessed).
How it works

A tax-free way of investing in shares or investment funds, up to an annual limit (currently £20,000 for 2021-22). Many unit trusts and OEICs (Unit trusts and open-ended investment companies) come pre-packaged as ISAs. Alternatively, you can choose for yourself which investments and funds to put in your ISA.

A way of investing for the future, with a ‘top-up’ contribution from your employer and tax relief from the government. Your money is invested in pooled funds.

A way of investing for the future, with tax relief from the government. Your money is invested in pooled funds. You can use a personal pension if you don't have access to a workplace pension.  You don't want to miss out on your employer's contributions.

A life insurance contract that is also an investment vehicle. You invest for a set term or until you die.

Endowment policies

A life insurance policy that is also an investment vehicle. It aims to give you a lump sum at the end of a fixed term. Often you choose which investment funds to have in your policy.

Whole-of-life policies

A way of investing a regular amount or a lump sum as life insurance. It pays out on death, and is often used for estate planning. Often you choose which investment funds to have in your policy.

Direct investments
How it works

Shares offer you a way of owning a direct stake in a company - also known as equities. Their value rises and falls in line with a number of factors, which might include the company’s performance or outlook, investor feeling and general market or economic conditions.

Investment funds (indirect)
How it works

Unit trusts and open-ended investment companies (OEICs)

Funds managed by a professional investment manager. There are lots of different strategies and risk levels to choose from and they can invest in one or more different asset classes.

Investment trusts

Another form of ‘collective’ investment where your money is pooled with that of other investors and managed by a professional investment manager. Investment trusts are set up as companies with their own boards of directors and they are listed  on the stock exchange. You invest in the fund by buying and selling shares in the investment trust either directly or through the products listed in the next table. Once again, there are lots of different strategies and risk levels to choose from.

Insurance company funds

Investment funds run by life insurance companies. When you invest through an insurance or pension product (see table below), you often choose how your money is invested. The choice might be from the insurance company’s own funds or into investment funds equivalent to those run by other managers.

Tracker funds

Some investment funds adopt a ‘tracker’ strategy. The value of the fund increases or decreases in line with a stock-market index (a measure of how well the stock market is doing). Tracker funds often have lower charges than other types of fund. Similar to tracker funds are Exchange Traded Funds (ETFs), which also aim to track particular indices. ETFs, unlike tracker funds, are traded on the stock market.

How much money will you get back?

There’s no guarantee of how your investment will perform. In the case of company shares, it depends mainly on the company’s performance, the economic outlook and investor expectations of how the company will perform in future.

With funds, the amount you get back depends on factors including how long you’ve invested for, the mix of different investments in the fund, the performance of those investments and the fees that you pay.  

A way to spread your risks is to choose a range of different ‘asset classes’. For example, this might mean choosing a fund that invests in a mix of:

  • cash
  • bonds
  • shares
  • bonds and property, and/or
  • investing in several funds.

Why fees are important

Fees and charges can reduce your investment earnings, especially over a longer period of time. When you invest directly, you usually have to pay ‘dealing’ charges.

Fees vary by fund, product and provider and won’t always be easy to spot. There might also be fees for fund platforms or financial advice, depending on how you buy your funds.

The number to look out for in fund documents such as the Key Investor Information Document (KIID) is the Ongoing Charges Figure (OCF).

The OCF takes into account the annual management charge (AMC) and all the expenses of running the fund.

Next steps

Once you know which type of investment, fund or product might suit you, you’re ready to think about investing.

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MoneyHelper is the new, easy way to get clear, free,
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Whatever your circumstances or plans, move forward with MoneyHelper.

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