Different types of UCITS funds

Money market funds invest in money market instruments (e.g. short-term debt instruments and time deposits), the prices of which are less at risk from price fluctuations and which generally with high ratings. They generally carry lower risks than other types of investment fund. They pay returns that largely reflect short-term interest rates, which tend to be higher than the interest offered by bank savings accounts.

Bond funds invest primarily in fixed-interest securities, such as bonds and other types of debt securities. Depending on its investment objective a bond fund may concentrate on a particular type of bond such as government bonds, corporate bonds, convertible or zero-coupon bonds. Bond funds typically pay higher returns than money market funds and usually carry lower risks than equity funds. While generally considered a low-risk investment choice, the market value of a bond can drop in response to a shift in interest rates. Additionally, bonds with especially attractive yields, such as those issued by governments or companies in developing markets or by companies with poor credit ratings, carry a greater risk of defaulting on interest payments or the return of the original investment. Most bond funds invest in a range of securities that vary in terms of risk and return.

Equity funds invest in the shares of companies listed on public stock exchanges or traded on other regulated markets. Equity funds can invest in a very wide spectrum of assets, and are usually distinguished from one another on the basis of four characteristics: company size, investment style, geographic region and sector. An equity fund generally aims to deliver long-term growth through capital gains. It can also generate income from dividends received from the companies in which the fund invests. The quality and quantity of a fund’s underlying assets will reflect the level of growth it aims to achieve, which is directly linked to its level of risk. As a general rule, the greater the expectation of growth, the greater the risk. Equity funds can be actively managed through stock selection and asset allocation or designed to track a specific stock market index.

Balanced (mixed) funds invest in a selection of equities, bonds and other fixed-income instruments. Mixed funds (also known as Balanced Funds) aim to deliver good growth and income while reducing risk. As a rule, the ratio of equities to fixed income will drive the degree of growth to be expected of a fund. The higher the equity component of a mixed fund, the greater the potential for higher returns it offers, but, likewise, the greater the risk. As a portion of the assets is invested in fixed-income securities, these funds usually offer greater stability and lower risk than pure equity funds.

Exchange Traded Funds (ETFs) typically track the movements of a particular index or a selected basket of assets. Because ETFs are traded on stock exchanges in the same way as shares, their price varies throughout the day. Investors can buy and sell units in an ETF during trading hours on the stock exchanges where they are listed. There are also actively managed funds that are listed on stock exchanges.
Lifecycle funds can invest in a selection of other investment funds or directly in securities of different asset classes, and are designed to meet investors’ changing needs and risk profiles as they grow older. The overriding aim of a life cycle fund is to invest early on in such a way as to potentially deliver strong capital growth and then to enable investors gradually to shift the emphasis towards capital protection as they get closer to retirement age. Initially, lifecycle funds invest in funds or assets that offer a higher risk and return ratio, such as equities. The asset allocation then gradually moves toward a more balanced portfolio of assets by increasing the proportion of fixed-income securities, and will finally concentrate on more cautious, conservative funds or assets. This investment approach aims to lock in earlier growth and preserve capital later on.

Maturity funds are designed to mature at a specified time and therefore have a fixed end date. Many investors use maturity funds as a retirement planning tool, while others focus on such saving targets as education expenses. Maturity funds can invest either in other investment funds or directly in assets such as (generally) bonds. The securities will be sold or - in the case of bonds - will have matured by the specified target date at the latest. The proceeds will then be paid out to the investor.

Guaranteed funds and capital protection funds are suitable for the cautious investor. These investment funds aim to ensure that the whole or a certain proportion (for instance 90 per cent) of the investor’s original investment is returned at the end of a pre-defined investment period. Other types of guaranteed fund can lock in gains as they are achieved during the fund’s investment period. Guaranteed and capital protection funds sometimes rely on the use of complex financial mechanisms to achieve their goal. The cost of providing the guarantee or capital protection means that they are unlikely to achieve the same returns during boom periods as comparable funds without capital protection. They are, however, very good for preserving the value of investments when markets fall. While a guaranteed fund implies a formal guarantee from the management company issuing the fund or from a third party, such as a bank or insurance company, a capital protection fund does not necessarily have this explicit guarantee.

Funds of funds offer a way of increasing diversification and a way of gaining access to a wider range of fund management skills and specialisation through a single investment. Rather than investing directly in financial assets like shares and bonds, funds of funds buy units in other investment funds. These can be different funds that cover the same sector, or funds offering a wide range of asset types, regions and markets. For some investors, putting their money in a fund of funds may be an easier way of diversifying their investments than allocating assets to funds themselves.

Asset allocation funds are funds whose investment strategy is driven by broader decisions on the relative performance of different types of asset, such as fixed income securities as opposed to shares. Different types of asset - shares, bonds and money market paper - are weighted differently on the basis of the portfolio manager's assessment and the requirements of the investment policy. The investment fund’s allocation to different assets may vary by sector, country, region or other considerations.