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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?

If you want to make small regular payments, you probably need to invest in a wrapper scheme like an ISA.

  • 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?

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

How can you judge the risk?

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.

Risk factors

  • Gearing
    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.

How gearing affects performance

 

  • Volatility
    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.

 

What is volatility

 
  • 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.

Find out more about discounts and premiums

Where to get advice on risk

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.

 

How discounts/premiums are calculated

 

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 discount is 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

If 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 share price 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.

Find out about getting financial advice

Understand share prices

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.

Discounts and premiums are usually calculated using the official last close price.

Past performance

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.

Sector classification

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.