Investment funds are one of the most accessible and efficient ways to grow your wealth. Whether you’re saving for retirement, building a nest egg, or diversifying your portfolio, funds allow you to pool your money with other investors and gain access to professionally managed portfolios.
This guide breaks down what investment funds are, the different types available in the UK, their benefits and risks, and how to get started in 2025.
What is an Investment Fund?
An investment fund is a pooled vehicle where investors combine their money to buy a diversified portfolio of assets such as:
- Stocks
- Bonds
- Property
- Commodities
- Alternative assets
Funds are managed by professional fund managers, who decide how to allocate money according to the fund’s objectives.
How Investment Funds Work
- You buy units or shares in the fund.
- Your money is pooled with other investors’ capital.
- The fund manager invests in line with the fund’s mandate.
- Returns — from income (dividends, interest) and capital growth — are shared among investors based on the number of units or shares they hold.
Types of Investment Funds
Here are the main types of funds available to UK investors:
| Fund Type | Description | Risk Level | Best For |
|---|---|---|---|
| Unit Trusts | Open-ended funds where you buy units directly from the manager. | Low–Medium | Beginners and long-term investors. |
| OEICs (Open-Ended Investment Companies) | Similar to unit trusts but structured as companies. | Low–Medium | Investors wanting flexibility and liquidity. |
| Mutual Funds | Widely used in the US but available in the UK via platforms. | Medium | Those seeking broad diversification. |
| ETFs (Exchange-Traded Funds) | Passive funds tracking an index, traded like shares on the stock market. | Low–High (depending on asset) | Cost-conscious investors or those who want flexibility. |
| Investment Trusts | Closed-ended funds traded on stock exchanges, often using gearing (leverage). | Medium–High | Experienced investors seeking higher returns. |
| Money Market Funds | Low-risk funds holding short-term debt instruments. | Low | Conservative investors or those needing liquidity. |
| Target-Date Funds | Automatically adjust the risk level based on your retirement timeline. | Low–Medium | Retirement savers. |
Active vs Passive Funds
| Feature | Active Funds | Passive Funds |
|---|---|---|
| Management Style | Fund managers actively pick investments. | Tracks a market index automatically. |
| Fees | Higher (typically 0.5–1.5% annually). | Lower (as little as 0.05–0.2% annually). |
| Performance Potential | Potential to outperform the market. | Matches market returns (minus small costs). |
| Best For | Investors seeking above-market returns. | Cost-focused, long-term investors. |
Benefits of Investment Funds
| Benefit | Explanation |
|---|---|
| Diversification | Spreads your risk across multiple assets and markets. |
| Professional Management | Experts research and manage investments for you. |
| Accessibility | Start investing with as little as £25 per month. |
| Cost Efficiency | Funds spread transaction and management costs across many investors. |
| Liquidity | Most funds can be bought or sold quickly. |
Risks of Investment Funds
| Risk | Explanation |
|---|---|
| Market Risk | Values can fall as markets fluctuate. |
| Manager Risk | Active managers may underperform their benchmarks. |
| Liquidity Risk | Some funds, like property funds, may restrict withdrawals during market stress. |
| Currency Risk | Overseas investments can be affected by exchange rate movements. |
| Fee Drag | High fees can erode long-term returns. |
How to Invest in Funds (UK)
1. Choose Your Platform
Popular UK platforms include:
- Hargreaves Lansdown
- AJ Bell YouInvest
- Interactive Investor
- Vanguard Investor
- Fidelity Personal Investing
2. Decide on Your Investment Style
- Passive: Cost-effective, long-term investing.
- Active: For those willing to pay for potentially higher performance.
3. Set Your Budget and Goals
Determine:
- Your investment amount.
- Time horizon (short-, medium-, or long-term).
- Risk appetite.
4. Diversify
Consider combining different asset classes (e.g., equity funds, bond funds, property funds) to balance risk.
5. Monitor and Review
Regularly review your portfolio and rebalance when necessary.
Tax-Efficient Ways to Invest
| Wrapper | Tax Benefits | Best Use Case |
|---|---|---|
| Stocks & Shares ISA | Tax-free growth and withdrawals. | Ideal for most investors. |
| SIPP (Self-Invested Personal Pension) | Tax relief on contributions and tax-efficient growth. | Retirement savers. |
| General Investment Account (GIA) | No upfront limits but liable to CGT and income tax. | Investors who have used up ISA and pension allowances. |
Costs and Fees
Typical costs include:
- Management fees: 0.1–1.5% annually.
- Platform fees: 0–0.45% annually depending on provider.
- Trading fees: Small charge when buying/selling funds (usually £0–£12 per trade).
Tip: Lower fees mean more of your money stays invested and compounds over time.
Example: Simple Fund Portfolio
| Fund Type | Example | Allocation |
|---|---|---|
| Global Equity Index Fund | Vanguard FTSE Global All Cap Index Fund | 60% |
| Bond Fund | iShares Core UK Gilts ETF | 30% |
| Property Fund | Legal & General UK Property Fund | 10% |
This balanced portfolio spreads risk while targeting long-term growth.
Performance and Returns
- Equity funds: Historically 6–8% annualised returns over the long term.
- Bond funds: Typically 2–4%, lower volatility.
- Blended portfolios: Around 4–6% depending on risk level.
Past performance is not a guarantee of future results.
Tips for Choosing the Right Fund
- Check the fund’s objective and ensure it aligns with your goals.
- Compare fees across platforms.
- Look at historic performance but focus on consistency, not just returns.
- Understand the risk rating and volatility.
- Start simple — broad index funds are often best for beginners.
Pros and Cons Summary
| Pros | Cons |
|---|---|
| Diversification | Market risk remains |
| Professional management | Fees can reduce returns |
| Easy access for beginners | Overwhelming number of choices |
| Tax-efficient options available | Active managers may underperform |
Final Thoughts
Investment funds are a versatile, beginner-friendly, and cost-effective way to build wealth in the UK. With options ranging from low-cost index trackers to actively managed portfolios, there’s a fund for every type of investor.
By investing consistently, keeping fees low, and staying diversified, you can build a portfolio that grows steadily and helps you reach your financial goals.
