Guide to investment companies
|The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of investment companies, incorporating investment trusts, VCTs and other closed-end funds.|
Investment companies are a way to make a single investment that gives you a share in a much larger portfolio. A type of collective investment, they let you spread your risk and access investment opportunities you wouldn't find on your own.
This guide is designed for investors without much experience, or people who haven't considered investment companies as an option yet.
Already know the basics? Find and compare investment companies
What are investment companies?
- Investment companies – the basics of how they work
- Venture Capital Trusts (VCTs) – investing in risky new businesses with potential for growth
Types of investment
- Ways to invest – directly or using wrapper schemes? Regularly or all at once?
- Wrapper schemes – what they are and why to use them
- Preparing to invest – steps to take before you begin
- Common mistakes – know what not to do
- Choosing a company – what to ask yourself when you make your choice
Getting the advice you need
- Getting financial advice – use an expert to find an investment that suits your needs.
What are investment companies?
Investment companies, sometimes referred to as investment trusts, closed end funds or closed ended, only exist to invest. They make a profit by buying and selling shares, property and other assets. An investment manager decides what assets to buy in order to build a diverse, managed portfolio.
When you buy shares of an investment company you make an investment that includes a share of all those assets. It’s a simple way of expanding your portfolio and spreading your risk.
You’re not investing alone. Different people contribute money to the company. When you invest you become one of its shareholders. This means investment companies are a type of collective investment fund, like unit trusts.
With an investment company:
- you gain access to a wider range of investments than you could normally buy yourself
- your investment is managed by an expert fund manager
- depending on the company you choose, you can invest in specific markets, industries or even small unlisted businesses which are at an early stage in their development
There are over 400 investment companies, many of which have existed for more than 50 years. They include:
The benefits of investing in investment companies
Investment companies are a type of collective investment fund. All collective investment funds have some benefits in common. In the next section we look at the special features of investment companies.
All types of collective investment funds, including investment companies, give you:
- economies of scale
When you buy shares you have to pay dealing costs and admin fees, which can eat away at the value of your investment. In an investment company, all the investors pool their money and split the admin costs. You can end up paying much less.
- a way to spread your risk
Each investment company owns shares in a range of investments, so buying shares in only one investment company effectively gives you a diversified portfolio. As you are not dependent on the success of just one or two investments, this spreads your risk.
- a professional manager’s expertise
Each investment company uses professional management expertise.
- a chance to invest small amounts
You can invest small lump sum amounts or even invest monthly. Most companies are available through savings schemes run by their managers, some of which start from as little as £20 a month.
Put all these benefits together and you find that collective investments are an effective and efficient way to invest in a diverse range of assets.
How investment companies work
|The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-end investment companies, incorporating investment trusts and other closed-ended funds and VCTs.|
- Closed-ended structure
- Listed on a stock exchange
- Boards of directors
- Shareholder democracy
- Different share classes
- Specialisation in particular sectors
Investment companies are known as closed-ended, rather than unit trusts which are open-ended.
In an open-ended fund, the fund is constantly expanding and contracting as investors move their money in and out of the fund.
This means that managers have to plan and manage the fund to be able to meet the demands for investors who may want their money back at any time. Open-ended funds are often restricted to investing in liquid assets, in other words investments that can be sold at short notice.
Investment companies, however, have no such issues, as they have a fixed number of shares in issue at any one time, which are traded backwards and forwards on the stock market, which has no impact on the portfolio.
In addition to allowing managers to take a longer-term view, this enables investment companies to invest in less liquid assets classes such as private equity, venture capital and commercial property, with the potential to deliver better long-term returns or higher levels of income.
Shares of investment companies are traded on a stock exchange, just like the shares of ordinary companies. They can be listed on one of several stock exchanges, for example:
- the Official List of the London Stock Exchange (LSE)
- the Channel Island Stock Exchange
- the LSE Alternative Investment Market (AIM)
In the UK, investment companies are most often listed on the LSE's Main Market.
Investment companies have independent boards of directors. The directors’ duty is to look after your interests as an investor, by ensuring the company is as successful as possible.
The directors meet several times a year and monitor the company’s performance. They answer to the shareholders, which means you have some say in how the company is run.
When you buy a share in an investment company you become a shareholder. Shareholders in investment companies have the same rights as other shareholders in other companies.
- vote on issues at the company's annual general meeting (AGM)
- table motions to be discussed
- call for extraordinary general meetings (EGMs)
- vote in a new board of directors if they are not happy with the current one
In other collective investments, you don’t have as much of a say in how the fund is run.
Investment companies, being companies, can borrow money to make additional investments. This is called 'gearing'. It lets the company take advantage of a long-term plan or a particularly attractive stock without having to sell existing investments.
The idea is that the additional investment makes enough money to pay off the loan and make a profit on top of that. If it works, the more the company borrows, the more profit it makes. If the investment fails, the more the company borrows, the more it loses.
Investment companies can usually borrow at lower rates of interest than you’d get as an individual. They also have flexible ways to borrow – for example they might get an ordinary bank loan, or issue preference shares.
Not all investment companies use gearing. Many of those that do use modest levels. It’s a decision taken by the fund manager and the board of directors. The gearing policy of the company may change from time to time. It’s regularly reviewed by the board and manager.
Other kinds of collective investments can’t use gearing to the same extent as investment companies.
Investment companies which issue only one class of ordinary share are commonly known as 'conventional' investment companies. The shares usually give shareholders a right to dividends and the opportunity to increase the capital value of their investment.
Some investment companies, called ‘split capital investment companies’ (splits) issue more than one class of share. These are designed to suit different types of investor and different attitudes to risk. Some split shares aim to pay high levels of dividends for investors who want an income. Others aim to pay out only a capital amount at the end of the company’s life.
Investment companies can invest in a much wider range of investments than other types of fund. In fact, they can invest in almost anything. The investment company will set out its particular approach in its investment policy.
Investment companies can specialise in things like:
- a particular region or type of company
- mainstream global companies
- companies from different parts of the world
- particular business sectors
There are various specialist investment companies including:
- Venture Capital Trusts (VCTs), which invest in young, high-risk companies
- property investment companies
- private equity investment companies
- hedge funds
Some investment companies are what are called a 'fund of funds' – they only invest in other investment companies, which means they take advantage of another layer of investing expertise (the fund managers in those investment companies). This can give good results, but the disadvantage is that you may be exposed to additional layers of operating costs and gearing.
The different investment companies suit different investment purposes. For example, you might put some core money in a large globally invested company, and add spice by investing a little extra with a smaller specialist company.
Each company has a fund manager who makes the day to day decisions about what stocks and other investments to buy and sell.
Most investment companies are managed by an external management group which may manage a number of companies. The board of directors select the fund manager (or managers).
Companies that have no management group involvement are called 'self-managed'. This means the board of directors selects and employs a salaried fund manager (or managers) directly.
Venture Capital Trusts (VCTs)
- What are Venture Capital Trusts?
- VCTs invest in small companies
- VCTs may be high risk
- Types of VCT
- VCTs and tax
- Tax benefits when VCTs are bought at launch
- How VCTs differ from other investment companies
- Non-qualifying investments
- Valuing the underlying portfolio
Venture Capital Trusts (VCTs) invest mainly in a specific type of company – small companies with high potential for growth that need some financial support.
VCTs get special tax benefits because of their importance in supporting the economy.
- VCTs invest in small, private up-and-coming companies, not well established public companies with a long track record.
- VCTs may be higher risk than conventional investment companies given the companies they invest in.
- VCTs should be viewed as long-term investments.
- VCTs offer generous tax benefits – but you shouldn’t invest in a VCT simply for the tax benefits.
- The value of the underlying investments of a VCT can be uncertain, as they are often unquoted investments that do not have a readily available market price.
- It can be difficult to sell VCT shares on the secondary market, although some VCTs offer a ‘buy-back’ facility.
- VCTs are generally more suitable for experienced investors, as they can be higher risk than other investment companies.
- Returns are not guaranteed and you may get back less than you invest or even nothing at all.
- You should take professional advice if you’re not sure whether VCTs are right for you.
VCTs typically invest in unquoted shares including:
- new shares of privately owned companies
- new shares of companies that are traded on the Alternative Investment Market (AIM)
VCTs invest in businesses that:
- promote innovation, industrial change and modernisation of working practices
- are not generating enough cash flow to get loans or other traditional sources of finance
- need a lot of capital (usually between £100,000 and £2 million), more than most single investors could afford
Investing in a VCT is a relatively low-cost way to access the benefits of a professionally run portfolio. But remember, with any equity investment your money is at risk.
VCTs employ a professional fund manager to make the day-to-day investment decisions. All VCTs aim to buy into companies that have the potential for good growth, but you should remember that they buy shares in small, often privately owned and young companies which may or may not succeed. They can be a much riskier investment than investing in larger, more established companies.
VCTs commonly fall into three broad sectors:
- generalist (which covers private equity including development capital)
- specialist sectors, for example technology or healthcare
However, the investment strategies employed by VCT managers differ enormously.
VCTs offer investors certain income and capital gains tax reliefs.
- no income tax on the dividends from your VCT shares
- no capital gains tax on the growth of your shares
- income tax relief on the initial investment when you buy new VCT share issues (providing you hold the shares for a certain length of time)
If the VCT itself doesn’t comply with a range of conditions, both the VCT and the investors lose all the tax benefits.
The tax relief you get from a VCT can be valuable, but you should never invest in a VCT just for the tax benefits. You should make sure the investment itself suits your needs, risk strategy and goals.
If you subscribe for new VCT shares – shares bought when the VCT launches or raises new money – you can get income tax relief. This tax relief can reduce your income tax bill to zero but there are limits on how much you can invest.
If you buy shares on the secondary market (i.e. someone else owned them before you) you can’t get tax relief on your initial investment, but you can still get tax-free income and capital gains.
VCT tax benefits
The table below shows the current tax benefits available on VCT shares:
Tax free capital gains
Rate of income tax relief on subscription
Maximum investment eligible for for income tax relief
Minimum time investor must hold VCT to qualify for income tax relief
Tax free dividends
Tax reliefs only apply to people aged 18 years or over who are UK income tax payers, and are only available if the trust maintains VCT status. The relief you get depends on your individual circumstances.
These tax rules may change in future. HM Revenue & Customs law and practice can change over time and investors who are unsure about their tax status should get independent advice from a professional adviser such as a solicitor, accountant, stockbroker or independent financial adviser.
Like all investment companies, VCTs have rules they must adhere to, set out by the management company and board of directors. But they also have to comply with additional rules in order for investors to receive tax relief.
The main rules are:
- At least 70% of their investments must be in qualifying investments – small companies (maximum size £15 million) that are unquoted or traded on the AIM rather than the main stock market.
- They must invest in the companies within three years of raising new money. Keep in mind that they may invest elsewhere while making these decisions, so the risks can be different.
If a VCT doesn’t meet these rules it could lose its approved tax status. You would lose your income and capital gains tax benefits.
The remaining 30% of a VCT’s money can be invested in essentially any investment. These are often stable investments like cash, listed equities and large company debt instruments. Some VCTs use higher risk options, which increase the overall risk of your investment. You should be able to read about the strategy in the VCT's prospectus and other literature. Make sure you know the facts so you can compare different VCTs.
Managing a VCT takes specialist expertise, so they generally have higher running costs than other investment companies. Like many other collective investments, most VCTs charge performance fees.
It’s hard to know exactly what a VCT’s portfolio is worth. Because the shares of unquoted companies aren’t freely traded on any recognised stock exchange, there’s no exact market value.
A VCT’s board of directors uses valuation methods, based on established principles (for example, the British Private Equity and Venture Capital Association’s Valuation Guidelines or the International Private Equity & Venture Capital Valuation Guidelines) to estimate the value of each private company shareholding. They can only be estimates. Sales depend on a willing buyer and the price they are prepared to pay at that time.
The extra work involved in performing these valuations means that VCTs will often only value their portfolio every three or six months. It also means that figures you see published may have been calculated weeks, or even months, earlier. This may be very different to the current share price.
AIM traded, and other investments traded on stock markets, are easier to value because there’s a quoted market price.
Preparing to invest
Step 1: understanding risk
If you’re completely new to investing the first thing to do is to familiarise yourself with the basics, particularly with regard to risk.
- Investing in the stock market is risky. When you invest, directly or through investment companies, you could lose your money.
- You can choose your level of risk by investing in different types of asset – for example, shares or bonds – and different areas of the world (also called “markets”). If you use an investment company they’ll let you know how they will invest your money.
- Investing gives you a chance to make more profit than you’d get by putting your money in a bank. Savings in a bank often lose value over time due to inflation. However, they are very secure.
- More risky investments should be held for the long-term. This gives your investment time to recover if it performs badly. You might be advised to plan to invest for 5, 10, or 20 years, especially if the investment is very high risk.
Step 2: your current situation
- assets: things you own, such as property or stocks
- liabilities: debts, such as a business loan or mortgage
- income: money from your salary or any other source
- expenditure: what it takes to maintain the lifestyle you lead
A financial adviser can help you work out what you can afford.
Step 3: research
How your investments are split makes a big difference to the performance of your portfolio.
To make informed choices, you need to understand how different investments are performing now and what the outlook is. You should research types of assets (equities, bonds, cash, property, money markets, etc) and markets around the world (such as the UK, North America and Asia).
It's a good idea to:
- read a variety of financial publications, newspapers and websites
- get a feeling for investment choices, strengths and weaknesses of different sectors and the performance of the markets
- look at what different experts advise and how opinions differ
For more information on research, see Useful links
Tips for investment planning
- Don’t risk going further into debt
If you’re in debt, think carefully before you make a risky investment in stocks or shares. You might find it wiser to invest in cash or bonds, which are more secure. They can often offer you reliable returns to help with any interest payments you have. Remember, high risk investment is not suitable as a way to get out of debt.
- Have some secure savings
Before you invest, make sure you have some "rainy day" money. Keep a secure fund in a bank or building society you can access quickly for any unexpected outgoings or emergencies.
- Make sure you can survive losses
All investments involve risks. To be truly comfortable investing you should be able to survive any losses. You're after a profit, obviously, but your finances shouldn't be crippled if you make a loss. This is closely linked to your timeframe for investing. How long can you afford to have your money committed to an investment?
- Avoid the pitfalls
Don’t put all your eggs in one basket. Invest in lots of different things, either yourself or through a fund. This is called diversification. It means that if one asset type or investment does badly you’ve got others to fall back on.
Don’t act on rumours. Do your own research, or get professional financial advice.
- Don’t follow advice blindly. Make sure that you understand the implications of any financial advice you’re given.
Don’t assume recent trends are stable. Equity markets can behave in unpredictable ways. Just because the market goes up for years on end, doesn’t mean it won’t go the other way tomorrow.
- Don’t take the first opportunity that presents itself. At least compare a few options first.
- Don’t change course at the slightest downturn. There are bound to be ups and downs in an investment. Re-evaluate your objectives and reasons for investing before making a decision to dispose of your investment.
- Don’t invest more than you can afford. Work out how much you’re going to invest and what you want to put into savings, and stick to it unless your circumstances change.
- Don’t take risks if you can’t afford to lose. High-risk investments are only a good idea if you could still get by if they failed.
- Don’t assume you’ll get a stable, consistent income. Income from an investment isn’t fixed and may fall.
- Don’t forget about inflation. Inflation affects the purchasing power of your money. If you’re not keeping up with inflation, you’re actually losing money. Take stock from time to time, and re-think how much you save or invest.
- Don’t rely on the prices in financial publications. You might not actually be able to buy or sell at this price. The price in financial publications may be the official last close price, buy price or selling price, all of which are different – sometimes very different. In some cases, you might not be able to sell all your shares in one go.
Ways to invest
- Investing with or without advice
- Investing via a wrapper scheme
- Regular savings
Investing with or without advice
- Investing with advice involves talking to a professional financial adviser, who will talk over your situation, needs and appropriate investments. Your adviser can help you decide if investment companies are right for you, and how to make your investment.
- If you invest without advice you’ll need to select your own investment company. You can either do this by buying your shares directly through a stockbroker or an execution-only dealing service, or you can invest via a wrapper scheme.
Wrapper schemes aren’t investments in themselves. Instead, they’re a way to buy and hold stocks and other investments, often without having to deal directly with a stockbroker. Often they offer tax breaks to encourage people to save and invest.
There are several different types of wrapper schemes. We give more detail on some of them here:
Instead of investing a lump sum you can choose to save regularly – as little as £20 per month.
Regular savings and investment schemes are an excellent way of reducing the risks of stock market investment. You can use them to put away a little each month, invest large sums gradually to smooth out stock market fluctuations or ease in to riskier investments.
One of the advantages of regular saving is known as ‘pound-cost averaging’. Buying some shares each month means you don’t need to worry too much about how the share price fluctuates – it’ll even out over the year. If you invest a lump sum you might be unlucky with the timing and buy when the shares are very expensive.
- What is a wrapper scheme?
- How wrapper schemes work
- Wrapper schemes can save you money
- Finding a scheme
- Reinvesting your dividends
- Using your old shares to buy into a scheme
- Buying shares for other people
- Selling your shares
Wrapper schemes like ISAs and pension schemes are a way to buy shares without having to use a stockbroker directly. You can use them to buy shares in investment companies. They go under many different names such as ‘Share plans’, ‘Investment schemes’ and ‘Savings schemes’.
Wrapper schemes make it easy to use investment companies for things like investing for children or saving tax-efficiently.
- The company running the wrapper scheme (e.g. a management group) puts the money into your chosen investment.
- You can invest monthly or make a lump sum investment or a combination of both.
- There’s no penalty for how you choose to run your investment. You can increase or decrease your regular payments (subject to the rules of your scheme) and even stop investing and start again later. The shares are yours to hold or sell as you wish.
A wrapper scheme manager usually buys shares for all the monthly investors within a scheme as one bulk deal with a stockbroker. By pooling all the investors' money, the manager can usually negotiate a discount on the dealing costs. These cost savings are passed on to you, making wrapper schemes a cost effective way to invest regularly in the stock market.
Many investment companies have shares available through wrapper schemes, usually run by their management companies. Many of them let you build your investment up from a small amount, with monthly payments from £20 in some schemes and lump sums or occasional top-ups from £50.
Some wrapper schemes only offer shares in one investment company. Some offer several companies under the management of the scheme operator. Some offer a wider range of investment companies and investments.
You can hold more than one company's shares within a scheme and hold as many schemes as you want. For instance, if you’re investing for income, you could invest in several different investment companies paying dividends in different months to give you a regular income.
Once you’ve decided which scheme you want to invest in, the scheme managers will send you all the paperwork you need. You just fill in the forms and enclose a cheque or direct debit details and leave it to the scheme manager to do the rest.
Scheme providers usually charge extra to cover the costs of administering the scheme. You can find these costs in the literature. Always work out the total costs involved before you invest.
All schemes will send you a statement of your account at an agreed time. It will show you the number of shares you have bought and any charges you’ve paid.
To monitor your investment, share prices can be found on our website, in the major newspapers, on investment company or management group websites and other financial websites.
If you are a regular saver, your dividend payments are usually added to your next monthly contribution. If you are a lump sum investor or have stopped contributing, the dividend payments will be held until they reach a minimum sum suitable for investment. You may not earn interest on any money waiting to be invested.
If you already own shares in other companies but you’d prefer to have a managed portfolio, you might be able to swap your old shares for investment company shares. Some schemes will sell your old shares and use the proceeds to buy shares for you within their scheme. It’s a cost effective way to transfer your holdings, and a lot of the admin is done for you.
You can buy shares as a gift for other people within a wrapper scheme, either for an adult or a child. You should consider the tax implications before you do this – for both yourself and the recipient.
Children can’t hold shares in their own right but you can designate them as beneficiaries or set up a bare trust.
All schemes let you sell your shares whenever you want. You can sell some or all of them. Sale arrangements vary between schemes. Some need you to give written notice before you make any changes.
You should find out the sale arrangements for a scheme before you buy. You’ll find them in the brochure and the terms and conditions.
Individual Savings Accounts (ISAs)
What is an ISA?
An ISA is a way to get special tax breaks when you save or invest. It isn’t an investment; it’s what’s referred to as a wrapper scheme. It’s a way of setting up an account or investment so it can benefit from certain tax breaks.
You can invest in most investment companies through an ISA, getting all the benefits of a diverse portfolio and an experienced investment manager, with extra tax relief.
For more information, download our consumer guide on Investment companies and Individual Savings Accounts (ISAs)
What can you invest in?
There are two types of eligible investment:
- cash – bank and building society savings accounts, National Savings, etc
- stocks and shares – investment companies, unit trusts, shares, bonds and so on
You can make either or both types of investment through an ISA each year.
How much can you invest in an ISA?
There is a limit to how much you can put into an ISA each tax year and this tax year the limit has increased considerably to £20,000.
A tax year runs from 6th April one year to 5th April the following year. For the period 6th April 2018 to 5th April 2019, the ISA limit is £20,000.
In each tax year, you can subscribe to one cash ISA and one stocks and shares ISA at the same time but this doesn’t affect the limit – the £20,000 must be split between them.
You can invest as much of this allowance in either cash or stocks and shares as you wish. For example, you could choose to open a cash ISA with £5,000 and then invest up to £15,000 in a stocks and shares ISA in one tax year. Alternatively, you could invest 100% of the allowance into stocks and shares, or 100% into cash.
What are the tax benefits?
- You don’t pay income tax on the income from your ISA – this includes income from dividends and interest.
- You don’t pay capital gains tax on the growth of your ISA.
- You don’t have to declare an ISA on your tax return.
On top of the extra value you get out of your investment, ISAs can lead to other tax benefits, depending on your situation.
- If you’re on the threshold between two income tax bands, investing within an ISA could keep you in the lower band. It means that your taxable income is lower, though your overall income might be similar to if you’d invested outside the ISA.
- If you’re over 65, income you get from investments held within an ISA won’t erode the higher personal tax allowance you get.
- If you’re a higher rate tax payer, the dividends and interest from your ISA doesn’t get included when you pay the extra tax levied on this income.
ISAs and capital gains tax explained
Capital gains tax is a tax you pay when you sell, give away or otherwise dispose of assets. At its simplest, you pay tax on any profit you get when you sell something you own – for example, your shares.
Usually if you make a loss on something, you can offset it against your gains and pay less tax – so if you sold some shares at a profit and some at a loss they would cancel each other out. But ISAs are completely free from capital gains tax. You don’t pay tax if you make money, and you can’t offset any losses you make against your other gains.
What investments qualify to be in an ISA?
There are strict rules about which investment companies and other investments can be included in an ISA. For investment companies, one rule is that the investment company’s own shares must be listed on an official list of a recognised stock exchange or admitted to trading on a recognised stock exchange. Investment companies which are quoted on the Alternative Investment Market (AIM) are also eligible for inclusion in an ISA.
The vast majority of investment companies qualify as ISA investments and you can find more information on these companies on our website.
Transferring an ISA
If you’re not happy with the types of ISA you’ve invested in you are allowed to make changes and transfers.
- If you have a cash ISA you can transfer the money into a stocks and shares ISA.
- You must move the whole of your current year's cash ISA, but can split previous years’ between different ISA managers
- You can’t transfer any money from a stocks and shares ISA to a cash ISA.
- You can transfer your ISA to another ISA manager.
You must get your ISA manager to handle the transfer – you can’t take the money out of the old ISA and put it into a new one yourself. Check the terms and conditions with your ISA manager to find out if you will be charged for transferring.
If you accumulate several ISA schemes over the years, you should review them from time to time, in case your investment needs have changed or the funds that you’ve been investing in haven’t performed as well as you expected.
Changes to tax law
HM Revenue & Customs tax levels and tax reliefs change over time. If you’re not sure of your tax status, get independent advice from a professional financial adviser, solicitor, accountant or stockbroker.
Investing for children
Investing some money – either as a one-off lump sum or on a regular basis – is an ideal way to give a child a head start in life. On this page we look at what to think about and the basic options for your investment.
- How to invest in shares for children
- Investigating the tax implications
- Saving for a child’s future
- Saving for school and university
- Why use an investment company to save for a child?
For more detail of investments and tax implications, download our consumer guide on Investment companies and investing for children
Children under 18 can’t hold company shares in their own name. You need to hold them on the child’s behalf. You can do this through a wrapper scheme, which will provide you with the paperwork to set this up. Some management companies have plans specifically for children.
You can choose to:
- hold company shares either in your own name and designate on the application form that you are holding them on behalf of a child (by adding the child’s name or initials to the form)
- hold company shares in a “bare trust” for the benefit of the child
When you set up any investment scheme you need to take a close look at the tax situation. This is especially important when you invest for children – the tax implications will affect you, the child and anyone else who contributes to the investment.
One of the most important questions to ask yourself is whether you will have to pay tax on the child’s investment income. This depends on who is contributing to the investment and what their relationship is to the child.
If you decide to make a gift to a child you should be aware of the Inheritance Tax (IHT) implications.
There are special accounts available to give tax breaks when you save for a child’s future. Depending on when the child was born, they might have a Child Trust Fund or be eligible for a Junior ISA. Both of these lock the money away until the child is 18.
If your child is not eligible for a CTF or a Junior ISA, or you don’t want to lock the money away for so long, there are other options, such as using an investment company scheme.
You can also open a pension scheme for a child – this locks the money away until the child is at least 55 years old.
- The Junior ISA (JISA) is designed to let you save for a child in the long-term. It was launched on 1 November 2011. It’s available for children under 18 born after 3 January 2011 and before September 2002. Those born between those dates were eligible for CTFs.
- As with an adult ISA, a Junior ISA is tax-free.
- For the 2018-19 tax year (6th April 2018 to 5th April 2019), friends and family can contribute up to £4,260 into a child’s JISA. Children can have one cash and one stocks and shares JISA at the same time but this doesn’t affect the limit – the £4,260 must be split between them.
- The money in the account belongs to the child, and is locked in until the child reaches age 18. After that the money is moved into an adult ISA. It won’t be subject to income or capital gains tax.
Child Trust Fund
- The Child Trust Fund (CTF) was a Government-sponsored saving scheme that has now been replaced by the Junior ISA. No new CTFs can be set up, but current funds are still valid.
- Originally, each child born on or after 1st September 2002 was eligible for a voucher from the Government for at least £250 to start the account (£500 for children from low income families). This was topped up again with the same sum as the child reached age 7.
- Government contributions for CTFs stopped on 1 January 2011, but friends and family can still pay money into the account up to a limit of £4,128 per year – the same as for a Junior ISA. Also like ISAs, the account is tax free.
- The money in the account belongs to the child, and is locked in until the child reaches age 18. After that the money is moved into an adult ISA. It won’t be subject to income or capital gains tax.
- Child’s pensions have been available since 2001. They’re like an adult pension – they lock the money away until the child is at least 55.
- In most cases, you can contribute up to £3,600 gross (£2,880 net) into the pension each year and get tax relief. You can pay more, but you won’t get tax relief on the extra.
When you invest for school or university fees you’re trying to achieve a certain level of return within a set time. The Junior ISA and Child Trust Fund, which lock in the money until the child is 18, aren’t suitable for school fees planning, but might be an option for university fees.
You should start by working out how much money you need, and by when, and then start looking for appropriate investments. This is a difficult and important type of investment – you’re likely to want financial advice.
Investment companies are effective and cost-efficient ways to save for children, and mean you can invest in a very wide range of options.
Investment companies often let you start by investing small amounts, making them flexible and accessible. You can also choose a level of risk you’re happy with.
A few investment company management groups offer pension wrapper schemes. They invest your pension in one or more of the investment companies they manage.
These pension schemes could suit you because:
- they’re a low-cost way to invest
- the charges are simple to understand
- you can increase or decrease the amount you pay in at any time
- you can invest relatively small sums each month if you want to or make a lump sum contribution
- you can spread your pension over a number of different investment companies
You can also take out a self-invested personal pension (SIPP), offered by some investment managers, stockbrokers and financial advisers. SIPPs give you even more freedom to choose the investments that go into your pension
For more information on pensions, tax reliefs and allowances go to the HM Revenue & Customs website.
Choosing an investment company
When you choose an investment company, ask yourself:
- What do you want from your investment? Do you want a regular income or are you putting money away for the long term so it can grow – or do you need both income and growth? There are investment companies designed for each option.
- Will you invest a lump sum or make regular payments?
- How much risk do you want to take?
Roughly speaking, the level of risk you might accept depends on how long you can afford to tie up your money and whether you can afford to lose any of it. If you've got time on your side, you might be comfortable with riskier investments.
- Do you want to invest in a particular sector?
Many investment companies only invest in a specific sector. You can pick one that will put your money in a specific part of the world or type of company.
More information to help you choose
When you choose your investment company, you should think about:
Risk versus reward
There is always a degree of risk in owning investments. In extreme circumstances you could even lose all your money, so it’s natural to want to know exactly what the risks are, and which ones you should take.
- How much risk should you accept?
- How can you judge the risk?
- Risk factors
- Discounts and premiums
- Where to get advice about risk
Roughly speaking, the level of risk you might be prepared to accept depends on how long you can afford to tie up the money and how much you can afford to lose. If you’re planning to invest for 10 years or more you may be able to take relatively more risk in exchange for the possibility of higher returns.
Investment companies are primarily intended as long-term investments. You should be prepared to hold them for at least 5 years, and preferably 10 or more
Investment companies can have very different levels of risk. This depends on things like:
- their portfolio and market diversification
- the use of gearing (borrowing extra money to invest)
- their various capital structures
Unfortunately, it’s not easy to make a precise assessment of risk. Markets are inherently unpredictable. Sectors that look unhealthy may start performing strongly and steadily, and companies that look dominant may suddenly reveal hidden weaknesses.
We’ve explained some of the risk factors you should look at lower down this page, but remember, it’s impossible to draw up hard and fast rules about the risk levels of a particular kind of investment company. You need to look at the whole picture, and might want to get an opinion from a qualified adviser.
Investment companies can borrow money to buy more assets, a process called ‘gearing’. They hope to make enough profit to pay back the debt and interest and leave something extra – but this doesn’t always happen, and they can lose money. The more an investment company borrows, the more risky it is.
The price of shares can go up and down, depending on how the company’s doing and how healthy the market looks. The more the value of a share price moves up and down over a period of time, the more volatile it is. Generally, volatile shares are more risky.
- Discounts and premiums
More often than not, investment company shares trade at a 'discount' – you pay less for the share than the underlying assets are worth. Don’t assume it’s a good deal. Movements in discounts add an extra level of risk to buying investment company shares.
You can get general information about financial services from the Financial Conduct Authority (FCA), previously the Financial Services Authority (FSA).
The FCA is an independent watchdog set up by the government to regulate financial services and protect your rights. It provides free and independent information about financial matters.
You can get free, unbiased money advice online, over the phone and face-to-face from the Money Advice Service.
Discounts and premiums
There are two ways that the value of a share in a investment company is often expressed:
The NAV of a share is the value of all the investment company’s assets, less any liabilities it has, divided by the number of shares. However, because investment company shares are traded on a stock market, the share price that you get may be higher or lower than the NAV. The difference is known as a discount or premium.
- Buying shares at a discount means you pay less than the NAV.
- Buying at a premium means you pay more than the NAV.
More often than not, investment company shares tend to trade at a discount.
An investment company trading at a discount can be a buying opportunity. However, you shouldn’t assume that buying at a discountis automatically a good thing. The price of investment company shares depends on a whole range of things, including the sentiment towards the investment company, its investment strategy and the type of investments it holds. There may be a good reason why it is trading at a discount.
When the discount changes
f you invest in investment company shares it should be for the long term so changes in the discount shouldn’t make too much difference to the end result – but it’s worth understanding nevertheless.
- If you buy at a discount, and the discount narrows (the shares start trading at a price closer to the NAV) you’ll get a better return than the performance of the underlying assets
- If the discount widens, you won’t necessarily make a loss so long as the NAV increases – but you won’t make as much of a gain as you otherwise would have.
Buying at a premium
When you buy shares trading at a premium, you need to have a good reason for paying more than the NAV, for example because you think the company will perform well in the future due to the type of investments it makes. However, if things don’t go well, the shares could move to a discount, increasing your losses.
If you’re not sure whether to buy, you should take advice from an independent financial adviser familiar with investment companies.
When deciding whether to buy, remember that published share prices can be either the official last close price, the selling price (bid) or the buy price (offer). Make sure you know which you’re looking at. You might have to buy or sell at something very different to the official last close price.
If an investment company made a profit in the past, or produced an income, that’s no guarantee it will do the same in future. You should never choose a company simply because it performed well in previous years.
What should you consider?
A company’s basic structure and goals are far more important than its past performance. You should make sure it suits your individual needs.
Make sure you know:
- what the company invests in
- how risky it is likely to be
- its charges
- your own investment objectives
When past performance is important
Although you shouldn’t use it to predict the future, it is still important to be aware of a company’s past performance. For example:
- it can give you an indication of how risky the company is likely to be in the future
- if you are interested in income, it can show you whether it has been able to maintain and grow dividends in the past
Our performance figures and what they mean
Where possible, we give past performance figures for every company listed on this website. To see them, search for an investment company
These performance figures should give a good idea of past performance, but you need to know how we calculate them.
- We don’t take into account transaction costs, so you need to think about how much extra you’d pay. Transaction costs include dealing charges, potential stamp duty (on purchase only), charges for advice and/or charges to buy or sell within a wrapper product.
- We don’t take into account income tax or capital gains tax or any reliefs from this you may be entitled to.
Why is sector classification important?
When you’re choosing an investment company, there can be a baffling range on offer. It helps if you narrow your choices down to ones that are most likely to suit you.
A good place to start is to decide which sectors offer the right characteristics. For example, if you are looking for income, you might want to consider sectors that specialise in delivering a high or growing income. Alternatively, you might want a good general investment company that invests globally and which aims to deliver both income and capital growth.
If you already have a reasonably well-balanced portfolio, you might be looking for something more specialist.
We have sectors which focus on particular parts of the world, or individual countries. Some focus on particular types of assets (e.g. property, private equity). Bear in mind that specialist investment companies can be more risky as they focus on one particular investment area.
What do AIC classifications mean?
The AIC classifies all investment companies into sectors. The classification framework provides a way of grouping companies with common characteristics to make it easier to search and compare within particular sectors.
Classifications are based on a combination of:
- regional or industry focus, and
- the company's investment objective
These classifications aren’t exact, since no two companies are ever the same, and there are no guarantees of a return on your investment.
Costs are an important consideration when investing. The greater the costs, the harder your investments have to work to deliver you a return. There are a number of different types of costs you might incur depending on how you choose to buy investment companies.
If you choose to take financial advice, you will need to pay the adviser for their services. Though this can be quite expensive, it could end up saving you a lot of money in the future.
There have been big changes to the way in which financial advisers can be paid, and advisers are no longer allowed to receive commission from the products they recommend.
There are three main dealing costs you may incur:
You buy investment company shares through the stock market using a broker, perhaps online or over the telephone. Charges for these services will vary, and could be a fixed fee or a percentage of the cost of the transaction. Many online brokers allow you to deal in investment company shares for less than £15 per transaction and can be very cost effective.
- Dealing spread
The dealing spread is the difference between the price you can buy and sell investment company shares for. The bigger the spread, the more the price has to rise for you to make a profit.
- Stamp duty
If you buy shares in UK based investment companies, you will normally have to pay 0.5% stamp duty on the value of the shares. There is normally no stamp duty on overseas based investment companies. There is no stamp duty on the sale of shares.
If you hold your shares through a wrapper scheme, such as an ISA, there may be costs to provide this wrapper and for holding the shares. These costs will be set out in the literature you will receive from the wrapper provider.
You can find out about all the costs incurred by an investment company in its annual accounts.
One of biggest costs is the fees that the investment company will pay to its fund managers for managing the portfolio. It may also pay a performance fee if the manager outperforms certain targets. You can find details of the management fee, and any performance fee, of all AIC members on this site.
To help you compare investment companies, the AIC also shows ‘Ongoing charges’ for all its members, which is a measure of the regular running costs of an investment company, expressed as a percentage. We also show a separate figure for ‘Ongoing charges plus performance fees’.
Getting financial advice
- What types of financial adviser are there?
- What advice do they give?
- Do you pay for the advice?
- Finding an adviser
- Preparing to talk to your adviser
Since 1 January 2013, financial advisers can either be ‘independent’ or ‘restricted’.
- An independent adviser (IFA) must consider a wide range of suitable investment products (including investment companies) to determine which bests meets your needs.
- A restricted adviser can only recommend a limited range of investments, or only those from one provider.
You should ask any adviser about the range of investments they recommend and why.
An independent financial adviser’s job is to offer impartial advice about a comprehensive range of financial products to help you find ones that fit your lifestyle and your goals.
- IFAs are qualified. An independent financial adviser is a qualified professional who has passed relevant exams and usually has some years of financial services experience. Advisers must be registered with the Financial Conduct Authority (FCA) (formerly the FSA) and may also belong to a professional body like the Institute of Financial Planning (IFP).
- IFAs are independent. An independent adviser doesn’t represent the interests of any one company or product. They shouldn’t have any ulterior motives in making you pick one product or another.
Independent financial advisers can give you advice on anything from tax planning to investments to insurance.
- They give advice that’s specific to you – their first task is to understand your particular financial situation and goals.
- They help you plan for the future and make the most of your opportunities.
- They’ll explain the best way for you to make the investment
- By seeing an adviser you are making no commitment to buy anything.
Before 1 January 2013, many advisers were paid by commission from the investment they recommended. As not all investments paid commission, and some paid more than others, there was concern that recommendations were being influenced by the amount of commission rather than what was in your best interests.
Though advice paid by commission was sometimes seen as free, in reality it was paid for through higher product charges.
From 1 January 2013, financial advisers can no longer receive commission for recommending an investment product. Instead, you will have to pay for their services directly. This may make it easier for some advisers to recommend investments, like investment companies, which did not pay commission.
There are several organisations which can give you details of advisers in your area. (Because these are not AIC sites we can’t guarantee they’re completely accurate.)
unbiased.co.uk (formerly IFAP) promotes the value and accessibility of independent financial advice to the public.
Find an adviser through unbiased.co.uk
- Institute of Financial Planning (IFP)
IFP promotes the profession and practice of financial planning.
Find an adviser through IFP
Findanadviser.org is a website run by The Personal Finance Society, the professional body for financial advisers.
Find an adviser through Findanadviser.org
Financial advisers can't make your decisions for you, or take away the risk of investing. They can only give you the facts as clearly as possible, help you to clarify your own thinking and give you advice.
Ultimately it's your money and your choice. That's why it's a good idea to do some preparation before you meet.
- Know why you're investing. Are you looking for an income or do you want to build a lump sum? Do you want a specific amount of money at a defined date, e.g. for school fees?
- Know how much you can invest and when. How much have you got to invest? Will you be adding to the amount regularly? When will you need the money?
- Know what financial commitments you have. That includes debts, savings, life insurance, personal health/critical illness insurance, pensions and mortgage. You should know the amounts involved in each.
- Prepare some questions first. Here are a few questions you may want to ask:
- What services do you offer?
- What will your services cost?
- What investments do you generally recommend?
- Do you recommend investment companies?
- What are the pros and cons of each suggested investment?
- What risks are involved with each suggested investment?
- What am I committing myself to?
- What are the problems if I change my mind or need the money earlier than anticipated?
- Don't feel pressurised. Remember that you don’t have to decide there and then. Plan on giving yourself time to consider. If you’re still unsure, you can get a second opinion – but you may have to pay extra for the advice.
What to expect when you meet your adviser
After you contact an IFA, he or she will usually make an appointment to meet you face to face. When you meet you’ll discuss why you’ve decided to invest and what you’re hoping to get out of investing, and your attitude towards investment risk.
- You’ll need to describe your financial situation, usually by completing a questionnaire.
- Your independent financial adviser will look carefully at your finances, your commitments and your objectives, and will explain your options.
- They’ll give advice about which investment products would suit you, and whether investment companies could be your best option.
- You can ask as many questions as you like.
If you decide to follow the advice, your adviser can also help you decide on the best way to arrange your investment.
Split capital investment companies
Split capital investment companies (splits) are generally just like other investment companies – they own and manage a portfolio of investments, and you can invest by buying shares in the company. The difference is that they offer two or more different types of share, to suit different investors.
Splits can be complex and you should not invest in them if you don’t understand the risks. It may help to get financial advice.
- The first splits: income versus capital growth
- Why invest in a split?
- Limited life and wind up
- Order of priority
- Share classes:
- Structural gearing
Splits first started in the 60s. They were investment companies that ran for a set period of time, after which the assets were all sold. They issued two classes of share:
- income shares meant the shareholder got the income generated from the company’s investments during its lifetime
- capital shares meant the shareholder got part of the lump sum when the assets were sold off at the end
Investors could therefore concentrate on either capital growth or income by buying whichever share suited them best.
Splits have several advantages:
- they can provide for a range of investment needs
- if you want to invest for a set time, they can give you a specific date for when the investment in the portfolio will be sold and your money returned to you
- some share classes have no income associated with them, so there's no income tax to pay. They can also be useful if you have unused capital gains tax allowances or capital losses
At least one class of share in a split is likely to have a limited life – this means that at a set date the company will need to sell off some or all of its assets and distribute the money to those shareholders.
If the whole company has a limited life this triggers a wind up procedure – the end of the company. At wind up, the company:
- sells off its assets
- pays off any debts, such as bank loans
- distributes what’s left over to the shareholders according to the rules of the different types of share
If you’re not looking to get your money straight away, the investment company will often give you the opportunity to continue your investment in a new investment company or some other funds. This is known as a ‘rollover’ and will normally be done in a tax-efficient way. If you take the cash option, capital gains tax may be payable.
You don’t have to hold on to your shares until the wind up date. You can sell them at any time, as you would with other types of share.
Each split works differently. One of the most important things to understand before you buy is the order of priority and entitlement. This means the set sequence of who receives what, and when.
For example, a split might have two types of share, one that pays out a pre-determined amount (say £1) per share, and one that pays an amount that depends on how well the company does. The shares paying the predetermined amount would usually have priority – on wind up, the money for them would be taken out first, and then the other shareholders would get whatever was left over. Bear in mind, though, that there is no guarantee that the company will be able to pay the full £1 per share, in which case other types of share might get back nothing.
As a rule, the lower in the order of priority the share, the riskier it is. This is because other shareholders need to be paid first, meaning that there may not be any money to pay any returns to shares lower down.
Below is a summary of some of the common share types and the priority they might have – but remember, each split is unique, and you should understand exactly how yours works before you invest.
- Zero dividend preference shares ('zeroes' or 'ZDPs') have a limited life. They aim to give investors back a certain amount of money when the investment company winds up – called the redemption value.
- The redemption value is set in advance. Even if the company performs better than expected, people who have ZDPs won’t get anything above what was initially agreed.
- People with ZDPs aren’t guaranteed to get the redemption value; if the company performs poorly they might get less, or even nothing.
- Usually people with ZDPs are entitled to payment at wind up before other shareholders (after any debts have been paid). The other shareholders split the amount left over.
- 'Zero dividend' means that zeroes don't provide income, so there's no income tax to pay. Any profit on the sale or redemption of a zero is taxable as a capital gain. This makes them tax-efficient for people who pay income tax but who don’t make full use of their annual capital gains tax allowance.
- Income shares aim to provide shareholders with regular returns in the form of share dividends.
- There are several different options for income shares. They give shareholders the right to some or all of the company’s distributable income, for example:
- up to a particular target income
- a percentage of the income the company generates
- all the distributable income generated by the company
- Some income shares also entitle shareholders to part of the company's capital on wind up. This is usually a predetermined amount, as in a ZDP.
- If the company performs poorly there’s no guarantee that you’ll receive either an income or capital growth.
- Income share entitlements depend on the structure of the company. They usually get top priority for the income revenue and the predetermined capital amount.
- You will be liable to income tax on dividends from income shares.
- Ordinary income shares are higher risk than other shares, but offer a higher potential for income and capital growth.
- Ordinary income shares are normally entitled to all the distributable income of the company.
- They also entitled to all leftover assets on wind up of the company, after every other share type has been paid off – they’re the lowest priority. This means if the company does well, ordinary income shareholders are likely to do very well, but if it does badly, and barely has enough to pay what it owes to the other types of shareholder, they may get no capital back at all.
- You will be liable for income tax on dividends from income shares, and capital gains tax on the capital growth.
- Capital shares are one of the highest risk types of share, providing the possibility of a high level of capital gains but no income during their life. They entitle shareholders to all leftover assets on wind up of the company, after every other share type has been paid off – they’re the lowest priority. If the company does well, capital shareholders can do very well indeed, but if it does badly, and barely has enough to pay what it owes the other types of shareholder, they get nothing at all.
- You are liable to capital gains tax on the capital growth from capital shares. They don’t give an income, so there’s no income tax to pay.
Some splits arrange for a combination of their share classes to be traded together in what is known as a 'unit'. The combination varies depending on the company.