Investors Chronicle - Funds, unit trusts, investment trusts and Oeics

Funds are collective investment schemes that pool investments to invest in a range of cash, shares, bonds or other assets. Individual investors buy units or shares, depending on whether the fund is a unit trust or an open ended investment company (Oeic), which entitle them to a share in the overall performance of the fund.

The main advantages of managed funds are that it is possible to gain exposure to the capital markets by investing small amounts of money - as little as £20 a month in some funds - and that they can provide automatic diversification for investors because they invest in a range of assets. Funds can be held within Individual Savings Accounts, allowing investors to avoid capital gains tax and income tax.

The wide spread of investments lowers the risk of investing in the stock market because it gives investors some protection against the impact of a small number of holdings in individual companies performing badly at the same time. Investing in more than one fund increases portfolio diversity.

Funds also allow investors to put their money into funds managed by specialists, and to devote part of their portfolio to investments that may be risky, but offer potentially high returns, such as emerging markets, commodities and smaller companies.

The fund management industry effectively began in the nineteenth century. Since then, it has expanded to offer an occasionally bewildering variety of products to suit a wide range of investment styles and budgets. Our guide helps guide you through the maze. See the headings below to find out more about investing in funds.