Portfolio of holdings
Collective investment schemes are a way of combining sums of money from many people into a large fund spread across many investments and managed by a professional fund manager. Your money is invested on a pooled basis by an investment manager in return for a fee.
There are a diverse range of funds that invest in different things, with different strategies – high income, capital growth, income and growth, and so on.
Risk diversification
Collective or pooled investments allow for risk diversification by providing you with access to a different sectors via one or more unit or share purchases. There are hundreds of pooled investment funds available, focusing on different sectors and countries.
Specialist funds are designed to concentrate on a very specific area, sector or type of investment. At the other end of the scale, you can choose a generalist fund with a global mandate that is able to invest in any type of company in any sector.
Other holdings
Obviously, a very general fund will be able to provide a high level of diversification by investing across a number of regions and countries, so that volatility in one area can be balanced out by other holdings.
But even specialist funds provide some diversification. For example, if you wanted to invest in UK smaller companies, it might be impractical (in terms of costs and research time) to invest in more than a few different companies.
Relevant sectors
A fund manager, on the other hand, can bulk buy shares and spread the investment further. He or she is also likely to have an in-depth knowledge of the sector and sometimes even a team of researchers at their disposal to keep an eye on relevant sectors for new opportunities and potential problems.
In addition, fund managers can gain access to markets and instruments that individual investors don’t have the knowledge, capital or perhaps even legal right to invest in, for example, hedge funds, companies listed in emerging markets, private equity situations or complex derivatives.
Market index
Most collective funds are actively managed, which means that the fund manager investigates all the potential opportunities available before buying and selling assets to provide a return for the investors.
Alternatively, you can also invest in a tracker fund, which will track a market index such as the FTSE 100. This type of fund is passively managed. It will aim to imitate the movements of a specific index, typically by buying a similar proportion of all the shares in the index to their index weighting. The charges are usually lower than for actively managed funds because you don’t have to pay a fund manager to beat the market or generate a steady return.