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Types of Funds

Actively managed funds

Fund managers select the shares and/or other investments that they expect will perform well. As market conditions change, they sell and buy other investments. Usually, they are aiming to beat some benchmark stock market index like the FTSE-A All Share. However, there is no evidence that they are consistently able to do this. All of the funds below, apart from tracker funds, are actively managed.

Tracker funds

These invest in a range of shares that are selected to mimic the performance of a given stock market index, such as, the FTSE-100 index. There is relatively little buying and selling of shares once the fund has been set up so costs are a lot lower than for an actively managed fund. For this reason, tracker funds are likely to be a popular default fund for stakeholder pension schemes. Tracker funds are generally considered suitable for people who don't like to take too much risk. However, you do need to look carefully at the index being tracked. Provided the index covers a broad spread of companies and industry sectors), the risk should not be high. However, if a few large companies or particular sectors dominate the index, you could end up with too many eggs in one basket. Some pundits think that the FTSE-100 Index is now quite risky to track because of the dominance of information technology and communication companies. Choosing a fund that tracks a broader index, such as the FTSE-250, could be a better option.

Deposit-based funds

Rather like bank and building society, deposit based funds invest in money market accounts, but pay higher interest rates. Therefore invested money is very safe in the sense that invested capital can't be lost. However, long term, the return on your money would tend to be low compared with funds investing in shares. Deposit-based funds are useful when you are approaching retirement. By switching from shares into deposits, you can lock in past stock market gains and protect yourself from any falls in share prices in the run-up to retirement.

With-Profits funds

Your return is linked mainly to the performance of a wide range of investments, such as, shares, gilts, bonds and property but also depends on other factors connected with the provider's business. The key difference from other types of funds is that your investment grows steadily as bonuses are added year-by-year and can't fall in value. This makes with-profits funds less risky than funds linked directly to shares or bonds.

Bond-based funds

These invest in gilts, corporate bonds and so on. They tend to be lower-risk than shares, however, long term they generally do not perform as well. If you are young and a long way from retirement, bonds might not be for you. However, as you get nearer to retirement it generally makes sense to spread your risks by putting some of your fund into bonds, increasing the proportion as retirement approaches.

Share-based funds

The fund invests mainly in a spread of shares but sometimes other investments too. The value of your investment rises and falls with the value of the underlying investments. Provided you choose a fund with a broad spread of shares, such as, 'UK managed', 'UK growth', 'International growth' and so on. This is a medium-risk way to invest and so is suitable for many people.

Specialist Funds

These invest in the shares and/or other investments of a particular country or particular sector, e.g., Japanese funds, smaller companies and recovery stocks. Specialist funds tend to be high risk; sometimes they turn in spectacular growth but equally there have been spectacular nose-dives too. Generally, these are not the place for the core of your retirement saving, but could be useful if you can afford to invest extra.

Self-Investment

Some providers offer pension schemes where you select the individual shares and other investments, which make up your pension fund. Charges for self-invested schemes are usually higher than for managed schemes and to manage risk you will need a good spread of investments, so this is generally an option only if you have a reasonably large sum to invest (say, £100,000 or more). You also need to be confident about your abilities to select investments that will perform well.

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