The 'no more than you need to know guide' to investments

If you’re considering whether to use some of your savings for investments, then you’ll find this guide indispensable. It tells you in simple terms how one of the UK’s most popular form of investment works and more importantly, how it can work for you.

Although many people like the potential rewards that stockmarket investments have to offer, some potential investors are put off by the word ‘stockmarket’. That’s regrettable. Because the reality is, that the stockmarket is not actually the ogre that some people perceive it to be. And that’s most certainly not the case when the risks are spread and investments are managed diligently and professionally!

Why people like funds

Rather than buying stocks and shares directly, many people prefer to invest in the stockmarket through what’s known as ‘collective investments’. There are two kinds of Collective investments: Unit Trusts and OEICs (Open Ended Investment Companies).Collective investments are also called ‘funds’ and funds are what this guide is all about - how they work and what they have to offer you.

Funds are to do with reducing stockmarket risk. It is the range of a fund’s investments – sometimes as many as two hundred - that makes collective investing fundamentally different to investing in individual shares. By investing in many different businesses, the fund manager is aiming to manage or ‘spread’ the risks– i.e., when some of the fund’s investments aren’t doing that well, others hopefully are, so that one investment compensates for the other.

A reminder why so many savers eventually become Investors

When you deposit your savings with a bank or building society you know that your money is almost as secure as it can possibly be. But there is a downside, which is that the long term returns from savings accounts aren’t as high as the returns you can expect from investments. And once you make allowances for inflation, the returns from your deposit account are, in real terms, substantially reduced!

That’s not to say that investing is all plain sailing. The price you pay for the better returns that funds can provide is that the value of your investment on the way up is almost certain to go down on the way there! And that’s one of the big issues that all investors, big and small, have to come to terms with when they first invest. But don’t let that put you off. There are funds that potentially could give you more than the deposit account but are almost as stable.

Three key points

Before doing anything else, you should consider the following for a moment or two. It will help you decide whether investing really is for you or not…

Like everything else in life, to get something out of investment, you have to put something in. So what are your feelings about risk? Would you want to go ‘all out’ for big rewards and take big risks? Maybe you’d to adopt a ‘give and take attitude’ as most seasoned investors do. Perhaps you hate the idea of taking any kind of risk, or you’re expecting something for nothing, in which case you should probably stick to saving and avoid investing altogether.

Be realistic in terms of timescales.

Investing is not a way to get rich quickly. History shows that the more time you can give your investments to grow, the better they’ll do for you. In an ideal world you should be prepared to wait for as long as 10 years. But it wouldn’t be unreasonable to expect to see some relatively worthwhile returns after five years or more. If however you think you might need to raid your investment pot every week, then leave your money in the bank

Know what you want of your investments – do you want to build up a large capital sum over time or are you looking for a regular income ASAP? Or perhaps you’d like a combination of both? You can always change your investment aims, as and when your needs and circumstances dictate that you should: in investment, nothing’s locked in stone!

Collective investing

OEIC’s (Open Ended Investment Companies) and Unit Trusts are as far as investors are concerned, one and the same - they’re what’s known as ‘collective investments’ or ‘funds’. In a fund, the capital of perhaps thousands of investors is combined and used to buy individual company shares. The choice of which shares to buy (and sell) is that of the fund manager who is responsible for the fund’s day to day performance.

Funds invest for different types of returns: some concentrate on generating a regular income for the investor, others focus purely on capital growth and there are funds that do both. On top of that, different funds follow different investment strategies. So if for example your preference is to invest in the UK’s smaller companies, larger companies or medium sized businesses or a combination of all three, then you can. There are funds that never invest in shares, preferring instead to invest in other types of assets, such as bonds, property and even cash. There are funds that invest only in the UK and there are others that invest all over the world. In other words, when it comes to collective investment, the world is literally your oyster.

Unit Trusts in detail

When you invest in a Unit Trust, your money buys ‘units’. The units vary in value according to how well (or not) the unit trust’s investments are doing. So the worth of your investment is mainly determined by the number and the value of the units you own. All unit trust funds are ‘open-ended’ which means they can issue new units in response to demand from investors. Unit trusts trade at their net asset value – that is the value of the investments held by the unit trust divided by the number of units issued. Unit trusts traditionally quote two prices; the buying/offer price and the selling/bid price. The buying/offer price is the price the units are sold to the investor; the selling/bid price (usually 5-6% lower than the buying price) is the price the investor will get when the units are sold. The difference between the two is known as the bid/offer spread. The price of the unit trust is calculated at daily, usually at midday. As well as an initial charge of XX% - XX%, unit trusts also levy an annual management charge, which typically is 0.25%-2.00% p.a. and is deducted from the fund itself.

OEICs in detail

OEICs are a relatively new type of investment fund and many Unit Trusts are converting to OEIC’s. An OEIC is a company whose business is managing an investment fund. The investor takes a stake in the in the fund by buying the shares of the OEIC (units) which in common with a unit trust is open ended. Unlike a unit trust, a single price is quoted for buying and selling the shares. An initial charge - typically 3% of the initial investment’s value - will be deducted from the investment plus an exit charge may be applied when you finally withdraw your money. Annual management charges are also taken from the amount you have invested in the OEIC...

You and risk

Establishing your views on risk and return makes it much easier to identify the most appropriate funds for you. At Torquil Clark we place investors in the following categories; which do you think you fits you best?

Totally risk-averse
Investors whose capital is not exposed in any way, shape or form to the stock market. Ultra conservative investors prefer to invest in government securities and deposit funds and as a consequence are prepared to accept possibly the very lowest returns from their investments.

Cautious
Individuals who prefer to invest the bulk of their capital in cash funds, government securities and other interest-based options, but may be willing to consider blue chip stock market investments for their potential over the long term.

Balanced
The type of investor who is prepared to invest in a mix of interest-based securities and equity-based investments. There will be some volatility, but this type of investor can reasonably expect higher returns than either of the previous two categories could provide.

Aggressive
Investors who seek potentially high returns over the long term through exposure to higher risk equity investments; in return they expect to experience some short term volatility and they also accept the possibility that they could lose some of their capital.

Highly speculative
The type of investor who’s willing to risk a significant loss of capital and tolerate periods of extreme volatility in the pursuit of the biggest returns.