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Buy direct or through a fund?

You can buy most assets (shares, debt, property etc.) directly but, as we explained in the section entitled what type of asset do you want to invest in?, it is not always practical to do so unless you have a very large pot of money at your disposal. Instead many investors invest all or part of their savings through a variety of funds. We are getting into areas where the industry jargon goes off the scale, with a number of acronyms which can be offputting even for many sophisticated investors – so apologies up front for this.

Open ended funds – unit trusts, OEICs (Open Ended Investment Companies) and UCITS (Undertakings for Collective Investment in Transferable Securities) – let you invest in a wide range of assets but some assets that the regulator thinks are too risky for individual investors aren’t allowed to be held by these schemes and instead are reserved for NURS (Non-UCITS Retail Schemes) and QIS (Qualified Investor Schemes), both of which are subject to stricter rules about who they are allowed to be sold to. This publication from the Investment Management Association is a bit technical but explains the rules better than we can.

Investment Companies are companies set up to make investments on behalf of their shareholders (also called closed-end funds and, in specific circumstances, investment trusts). We have written extensively on this topic – you can get started by reading Investment Companies – the basics.

ETFs (Exchange Traded Funds) are a bit like index-tracking investment companies. They trade on an exchange like an investment company and can trade at premiums or discounts. Some are a lot more straightforward than others – make sure you understand the ins and outs of short ETFs and geared ETFs before you go anywhere near them for instance. Here’s a link to a guide that explains how these products work.

Limited Partnerships (LPs) are commonplace in the private equity and hedge fund world. Each will have a General Partner who is also often the manager of the fund. The minimum investment in these funds is often quite high – £250,000 to £1m is not unusual.

Funds and direct investments can be held through a variety of tax efficient wrappers

 

 

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