Investment types

Unit Trusts, OEICs/ICVCs are pooled funds of investors' money which are used to buy a range of shares, gilts, bonds or cash deposits. They are open ended funds meaning that the size of each fund can vary according to supply and demand. They provide a mechanism of investing in a broad selection of shares which reduces the risk of investing in individual shares.

When you invest in a Unit Trust you buy a unit which is a portion of the total fund. Each fund has its own investment objective controlled by a fund manager. The fund manager will invest the money on behalf of the unit holders (or shareholders). The value of your investment will vary according to the total value of the fund which is determined by the investments the fund manager makes with the fund's money. To cover the costs of running a fund you will usually have to pay an annual fee for ongoing costs such as administration. You can invest into a Unit Trust or OEIC/ICVC through an ISA (Individual Savings Account). There are no additional charges for having an ISA and you have the advantage of the investment being tax-free.

A corporate bond is a loan to a company. It is essentially a way for a company to raise money by offering investors a fixed level of interest on the amount lent (invested).

The level of interest payable to the investor will largely be governed by the financial strength of the company and therefore the likelihood of full capital repayment at the end of the term of the loan.

The lower the risk of capital loss, the lower the interest rate payable and vice versa.

For example, a large blue-chip company such as British Gas is likely to offer a lower rate of interest than a smaller company quoted on the AIM stock market.

Where the risk of default is higher, these are known as high yield corporate bonds.

Corporate bond funds invest in a basket of corporate bonds to mitigate risk. They are generally considered to be lower risk than equites (but higher risk than deposit accounts) and are ideal for income seekers willing to accept a degree of risk to their capital. The underlying capital value can fall as well as rise, but these movements tend to be less than with equities.

Similar to a corporate bond, a gilt is also a loan or an IOU but to a government as oppose to a company. Again, your level of return would reflect the ability of a government to meet its obligations. As an example, a UK government may pay less interest to you than that of an emerging country which could pay more but would give you a higher element of risk.

A tracker fund aims to mimic the performance of an index such as the FTSE 100 All-share and is considered to be a passively managed investment. One of the primary advantages associated with investing in a tracker fund is that the charges are typically lower when compared with actively managed funds. This is due to the fact that tracker funds are automated and are not run by a fund manager and will therefore not carry out the same level of market analysis.

When talking about multi-asset funds, one of the most important aspects is their unique diversity. The majority of funds spread risk across multiple asset classes and securities but predominantly have a specific theme such as UK equity, US smaller companies, corporate bonds and so on. This is the general idea of a Unit Trust, a pooled investment giving you the unique opportunity to spread your risk. However, with a multi-asset fund, this could, for example be increased to around 1,500 stocks in asset classes spread over 50 countries. With exposure to UK equities, cash, emerging markets debt, European equities, high-yield bonds, investment grade debt and real estate investment trusts, this truly is diversification.