With over 3,000 funds to invest in, a good starting point when choosing funds to buy is to understand fund sectors such as Income Funds, Equity Funds and Absolute Return Funds.
Understanding the fund sectors makes buying funds more manageable. The good news is that The Investment Association has done the hard work!
Understanding Broad Groups
The Investment Association broadly defines funds in the key categories of Income, Growth, Capital Protection, Specialist Funds and those with a specific outcome intention.
Segmenting funds is hugely beneficial to you as an investor because not only do you make the fund universe more manageable to navigate but you can easily make comparisons between funds in one or multiple sectors – ranging from their performance to their charges.
For the purposes of this guide, you will be presented with an overview of some of the fund sectors that are more popular with investors with the intention to give you a good grounding.
Income Funds – Primary Aim of Providing an Income
These funds are looking to provide an income, there are a number of sectors within this broader grouping including UK gilts, Sterling Corporate Bond as well as UK Equity Income. Each category as defined by The Investment Association has particular requirements that the fund must correlate to.
For example, a UK Equity Income fund must invest at least 80% of the portfolio in UK equities and look to achieve a specified yield on distributed income. Likewise, a Sterling Corporate Bond fund must invest 80% of assets into a Sterling denominated, triple BBB minus or higher corporate bond securities.
Growth Funds – Primary Aim of Capital Growth
Funds within this broader group are looking to grow your capital – think of it as trying to grow your ‘profit’ rather than a regular, solid income stream. They can include UK Equity Funds, Overseas Equity Funds & Mixed Asset Funds.
Like Income Funds, they have a set of defined characteristics they must meet in order to be classified in their respective sectors. Let’s take a look at a few so you can see how the requirements differ:
- North America Funds – Funds which invest at least 80% of their portfolio in North American shares
- UK Smaller Companies – Funds which invest at least of 80% of their portfolio in UK shares in consideration to companies that form the bottom 10% by market capitalisation.
- UK All Companies – Funds which invest at least 80% of assets in UK equities.
- Mixed Asset Funds – Funds in here generally have combined different types of investments but may contain shares. There are various percentages allocated, e.g. Mixed Investment 0-35% Shares or Mixed Investment 20-60% Shares – designed to give you a piece of everything. Much like a buffet – from equity exposure to fixed income and cash.
Specialist Funds And Outcome Funds
The other main groupings from The Investment Association are:
- Specialist Funds – these include UK Direct Property (invest at least 70% of assets in UK property) as well as Technology & Telecommunications (invest at least 80% of assets in technology and telecommunications sectors).
- Outcome Funds – the one you may hear about here is the ‘Targeted Absolute Return’ fund. Funds within here try to secure positive returns in any market conditions (good or bad). However, returns are not guaranteed as the title doesn’t suggest! Funds in here have a limited timeframe to meet their objective – no longer than 3 years.
And Lastly, Unclassified….
This is the final broad grouping, but no it is not a super-secret exciting fund category. These are just funds that don’t want to be classified or funds that have been removed from the sectors outlaid by Investment Association due to non-compliance.
Choosing Funds to Buy – Letting Sectors Guide You
With thousands of funds to choose from, it is important you have a mechanism to start filtering through the choices. Starting with the broad groupings (such as Income and Growth respectively) is a great way to start. You can then drill-down further, gaining relevant insight and comparisons to make a choice you are completely comfortable with.