It's a way of pooling money together with other investors. The fund invests your money in 'assets' - professionally managed by a fund manager. The fund manager decides which type of assets will be bought and sold by the fund. There are four main asset classes. Each one works in a different way and carries its own particular risks.
The four main asset classes are:
Money on deposits (e.g. cash in a bank or building society account) or short term (normally less than a year) loans to raise cash.
Loans made to companies or the UK Government which pay an agreed rate of interest until a set date.
Money invested in commercial property which aims to deliver rental as well as capital growth.
Stakes in companies (often called equities) where the growth depends on several factors including how well those companies perform.
You have to accept some level of risk when you make an investment but how much depends on what you want to achieve and how quickly you hope your money will grow.
The tendency of a particular investment to rise and fall in value is reflected in its 'volatility'. A more volatile investment will tend to see frequent and/or sharp rises and falls while a less volatile fund is likely to both rise and fall more slowly.
Higher risk investments are likely to fluctuate more in value over time - they may swing from being higher in value, to lower in value, more often.
Choosing a low risk investment means that your money is likely to fluctuate by smaller degrees but you are less likely to see higher growth. Such an investment will normally change less in value over a period of time. In real terms, it will be worth less if inflation is higher than the return you receive.
The general rule is that the greater the potential for growth, the more risk you may need to take.
Depending on the funds you choose, the levels of risk and potential investment performance differ. There's always the risk that your money could be worth less than when it was originally invested. If you're investing in a retirement savings plan this would result in a reduced pension in the future.
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