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 off putting even for many sophisticated investors – so apologies up front for this however here and throughout our Education menu, we try to tackle some of this.

Open ended funds

Open-ended funds, such as Unit Trusts, Open-Ended Investment Companies (OEICs), and Undertakings for Collective Investment in Transferable Securities (UCITS), are extremely popular among private investors, offering a simple and effective way to diversify their portfolios across a wide range of assets. These funds are designed to provide easy access to various investment options while ensuring that the underlying assets can be bought or sold without affecting the fund’s overall value.

The popularity of open-ended funds can be attributed to their liquidity and flexibility, making them an appealing choice for both novice and experienced investors. However, it’s important to note that certain assets deemed too risky by regulators are not permitted in these schemes. Instead, these high-risk investments are typically reserved for Non-UCITS Retail Schemes (NURS) and Qualified Investor Schemes (QIS). Both NURS and QIS are subject to stricter regulations regarding their sale, ensuring that only eligible and more experienced investors can access these riskier asset classes.

For private investors, open-ended funds represent a balanced approach to investing, combining liquidity with a broad asset range, thus making them suitable for various investment strategies. Understanding the distinctions between these fund types can help you make informed decisions and align your portfolio with your financial goals. This publication from the Investment Management Association is a bit technical but crosses the t’s and dots the i’s.

Investment Companies

Investment Companies (or Investment Trusts) 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 guide that explains how these products work.

LPs

Limited Partnerships 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.

LTAFs

The Long-Term Asset Fund (LTAF) is an innovative investment structure authorised by the Financial Conduct Authority (FCA) in the UK. This open-ended, evergreen fund is designed to provide a broader range of investors, including individual savers and pension schemes, with efficient access to private, illiquid assets.

As a new offering in the investment landscape, LTAFs allow UK investors with long-term financial goals to diversify their portfolios by investing in alternative asset classes such as infrastructure, private equity, and real estate—opportunities that were once primarily available to institutional investors.

One of the key features of LTAFs is their flexibility; unlike traditional closed-end funds, they offer investors the ability to access their investments periodically while still pursuing the potential for higher returns associated with private market investments. By facilitating access to these less liquid assets, LTAFs empower UK savers to make informed investment decisions that align with their long-term financial aspirations.

Tax Efficient Wrappers

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