Different types of UCITS fund

Money market funds invest in a range of low-risk, high-quality short-term debt instruments. They generally carry lower risks than other types of investment fund and 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 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, a shift in interest rates can see the market value of a bond drop. Additionally, bonds with attractive yields issued from governments or companies in developing markets carry a greater risk of defaulting on interest payments or the return of the original investment. Most bond funds hold 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. While the spectrum of assets an equity fund can invest in is vast, equity funds are usually distinguished from one another on the basis of four high-level categories: company size, investment style, geographic region and sector. An equity fund generally aims to deliver long-term growth through capital gains, although it can deliver income through 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. Generally speaking, the greater the expectation of growth, the greater the risk incurred. Equity funds can be actively managed through stock selection and asset allocation or designed to track a specific stock market index.

Balanced funds invest in a selection of equities, bonds and other fixed-income instruments. Balanced funds (also known as mixed funds) may aim to deliver good growth and income while minimising risk. The ratio of equities to fixed income will usually drive the degree of growth an investor can expect. The higher the equity component of a balanced fund, the greater the potential for higher returns it offers and the greater the risk. Since a portion of the assets is invested in fixed-income securities, they usually offer greater stability and lower risk than equity funds.

Exchange traded funds 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 an ETF during trading hours on the stock exchanges where they are listed. There are also actively managed funds that are traded on stock exchanges.
Lifecycle funds 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 deliver strong capital growth early on and to enable investors gradually to shift the emphasis towards capital protection as they get closer to retirement. Life cycle funds will in the initial stages invest in funds or assets that offer a higher risk and return ratio, such as equities. The asset allocation will gradually move 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.

Maturity funds, also known as target date funds, differ from life cycle funds in that they are designed to mature at a specified time. While many investors use maturity funds as a retirement planning tool, others focus on areas such as education fees or other key lifetime events. Maturity funds can invest either in other investment funds or can invest directly in assets such as equities and bonds. Whatever the type of assets held by the fund, they will be sold or will have matured by the specified target date and the proceeds paid out to the investor.

Guaranteed fundsand capital protection funds are designed 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 straightforward funds. However, when markets fall they can be valuable in preserving the value of investments. While a guaranteed fund implies a formal guarantee from the management company issuing the fund or from a bank or assurance company, a capital protection fund does not necessarily have this explicit guarantee.

Funds of funds offer a way of increasing diversification and 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 invest, as the name suggests, in other investment funds. They can invest in different funds that cover the same sector, or in 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 selecting various funds covering different sectors themselves.

Asset allocation fundsare 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. The investment fund’s allocation to different assets may vary by geography, sector, style factors or other considerations.