Facts about funds
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Other types of investment product
There is a wide range of other investment products available. However, they have different legal structures, and are regulated and protected differently from authorised funds. These include:
Unit-linked and with-profit funds
Investment companies
Another form of collective investment available to investors is investment companies, more commonly known as investment trusts. REITs (Real Estate Investment Trusts) or VCTs (Venture Capital Trusts) are types of investment company.
Investment companies are not authorised funds. Instead, they are listed companies subject to special rules. They issue shares, which are traded in the same way as the shares of ordinary listed companies, and investors can buy or sell their shares via stockbrokers or online share dealing services.
They are sometimes referred to as 'closed-ended funds'. This is because, unlike 'open-ended funds' (eg. unit trusts, OEICs and offshore UCITS), the number of shares is fixed from one dealing day to the next. Therefore, the price of investment companies will rise and fall in line with the demand for the shares. This means the stockmarket value of the investment company can be at a premium or a discount to the net value of the assets in the investment company.
To find out more, visit the Association of Investment Companies’ website or the British Venture Capital Association.
Structured products
The term ‘structured products’ covers a wide range of investments. Sometimes funds are called structured because they have special features such as ‘lifestyling’.
More commonly, the term structured products refers to products offered by banks. They tend to offer capital growth or income linked to a particular index over a fixed term and "guarantee" to return your capital.
Technically they are bonds because they are debt instruments, but they are different from ordinary corporate bonds. The value and returns of a structured product are linked to performance of the underlying investments or to a particular market. The investor has no ownership of the underlying assets but is 100% exposed to the issuing bank. Indeed, the bank may not even own the underlying assets, but be 100% exposed to another financial institution via a connected contract, such as a derivative. This gives rise to concentrated counterparty risk.
Exchange-traded products
These are products that you can buy and sell via a share dealing service or broker, in the same way as you might buy a share in a company. Sometimes these products are referred to as ETFs (exchange-traded funds), but not all exchange-traded products are funds. Some products use the label ETF but are actually structured products in the form of debt instruments (such as bonds) or derivatives.
Funds that are ETFs are UCITS, which are listed and traded on the London Stock Exchange. They offer the benefits of exposure to a market or index relatively cheaply. Many of these are passive (or index tracker) funds. However, there are now other types of ETF that use derivatives to simulate the returns of the index or market.
For a more detailed description of ETFs, visit The Money Advice Service website.
Unit-linked or with profit funds
Certain types of insurance products are commonly referred to as ‘funds’ (such as unit-linked or with-profit funds), but they are not collective investments. They are contracts with an insurance company.
The value or return on the contract may be linked to one or more underlying authorised funds that the consumer has chosen. However, the consumer is not actually an investor in the funds and does not have ownership of the fund’s assets. Instead, the consumer is 100% exposed to the insurance company.
The insurance company can set its own restrictions and charges on switching investments between funds and on withdrawals.
To find out more, visit the Association of British Insurers’ website.
Investment bonds
A form of life insurance policy that allows you to invest in a range of funds by making a one-off lump sum investment. You are then paid a regular income from the policy and a capital payment when the policy matures.
Contact the Association of British Insurers for further information about investment bonds and other types of life insurance such as unit-linked and with-profits.