Guide to investment companies
Guide to investment companies
Explore how investment companies work, and start to discover which one might be the right investment for you.
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.
- What are investment companies (investment trusts)?
- Different types of investment companies, shares and securities
- Why choose investment companies
- Choosing an investment company
- Investment company performance figures and what they mean
- Sector classification
New to investing?
How to get started
One of the most important decisions when investing is to understand what you’re investing for – your goal. Is it to grow money over the long term for something like a pension, a house, or to pass on to your children? Or are you looking to get an income from your investments? Perhaps it’s a combination of the two?
Answering this question will help you know what to look for when choosing your investments.
Speaking to a financial adviser can help you define your investment goal. There’s more on getting financial advice later in this guide.
Before you invest
Step 1: understanding risk
If you’re 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 you could lose 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.
- 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 investments time to recover if they perform badly. You should plan to invest for 5, 10, or even 20 years, especially if the investment is very high risk.
Step 2: your current situation
Look carefully at your current financial situation. You need to work out how much you can afford to invest. To do this, you will need to consider your:
- 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 could 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 pay off the debt first. Remember, high-risk investment is not suitable as a way to get out of debt.
- Before you invest, make sure you have some "rainy day" money. Keep a secure cash fund in a bank or building society you can access quickly for any unexpected outgoings or emergencies.
- 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?
Many new investors end up making similar basic mistakes. To help you avoid some of the pitfalls of investing, here’s what not to do
- 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.
Risk vs. rewards
It’s a central principle of investing – the higher the risk, the higher the potential rewards
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.
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.
Remember, it’s impossible to draw up hard and fast rules about the risk levels of a particular kind of investment. You need to look at the whole picture and might want to get an opinion from a qualified adviser.
Where to get advice on risk
You can get general information about financial services from the Financial Conduct Authority (FCA).
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 and over the phone from the Money Advice Service.
What are funds and why invest in them?
A fund is a collection of lots of different people’s money. The money is managed by a professional fund manager who invests it across a range of different assets, like shares, property or other assets depending on the fund.
There are many types of fund such as investment companies, unit trusts and exchange traded funds.
They make a profit by buying, holding and selling investments. When you invest in a fund your investment is spread across all the fund’s assets. It’s a simple way of expanding your portfolio and spreading your risk.
When you invest in a fund you become one of its investors.
With a fund:
- You gain access to a wider range of investments than you could normally buy yourself.
- Your investment is managed by an expert fund manager.
- Your money is spread across a number of different investments, giving you a diversified portfolio and spreading risk.
- You gain economies of scale as the fund management and admin costs are spread amongst the investors in the fund.
- You can invest small amounts often starting from £30 a month.
- Depending on the fund you choose, you can invest in specific markets, industries or even small unlisted businesses which are at an early stage in their development.
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.
What are investment companies?
What are investment companies (investment trusts)?
A guide to getting started
Find out what makes an investment company tick.
Investment companies (often known as investment trusts) are a type of fund. They have a number of unique features which we will explore in this section.
- Listed on a stock exchange
- Closed-ended structure
- Share prices
- Discounts and premiums
- When the discount changes
- Boards of directors
- Shareholder democracy
- Specialisation in particular sectors
One of the unique features of investment companies is that they are public limited companies (plcs). Their shares are listed on a stock exchange just like those of any other public company and you invest in investment companies by buying and selling their shares.
Investment companies can be listed on one of several stock exchanges but the majority are listed on the London Stock Exchange.
Investment companies are known as closed-ended, as opposed to unit trusts which are open-ended.
What’s meant by investment companies being closed-ended is that they have a fixed number of shares in issue at any one time. You invest in an investment company by buying the shares from another investor on the stock market. Similarly, when you want to sell your shares, you sell them to another investor.
In contrast, open-ended funds expand or contract depending on demand as investors move their money in and out of the fund. This means open-ended funds have to be managed in way so that they can give investors their money back at any time. This includes normally investing only in assets which can be sold very quickly and keeping part of the fund in cash to cover withdrawals.
Because investment companies are closed-ended, they don’t have to deal with these inflows and outflows. This allows them to invest in assets which can be hard to buy and sell like infrastructure, private companies or specialist property, with the potential to deliver better long-term returns or higher levels of income. It also enables investment company managers to make long-term investment decisions as they don’t have to buy and sell investments based on investors moving money in or out of the fund.
When you invest in an investment company you buy its shares on the stock market. There a few different ways that share prices can be shown.
The price you buy shares for is higher than the price you sell shares for. The buying price is called the ‘offer’ price. The selling price is called the ‘bid’ price.
The difference between these two prices is called the ‘bid-offer spread’.
There are two ways that the value of a share in an investment company is often expressed:
- The share price – the price you actually buy and sell at.
- The net asset value per share (NAV) – the value of the investment company’s assets, less any liabilities it has, divided by the number of shares.
The NAV of a share is the value of all the investment company’s assets, less any liabilities such as any debt, divided by the number of shares. However, because investment company shares are bought and sold on a stock market, the share price is affected by supply and demand, so it might 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 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.
If you invest in an investment company it should be for the long term, so changes in the discount shouldn’t make too much difference – but it’s worth understanding nevertheless.
- If you buy at a discount and the share prices rises faster than the NAV, narrowing the discount, you’ll get a better return than the underlying NAV.
- If the discount widens, for example by the NAV rising faster than the share price, you won’t get as good a return as the underlying NAV but you won’t necessarily make a loss.
Because investment companies are public limited companies (plcs), they have independent boards of directors, just like any other plc. 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 new directors if they are not happy with the current ones.
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. So the more an investment company borrows the more risky it is.
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.
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).
With interest rates at very low levels, many investors are wanting to generate income from their investments.
Investment companies have a number of advantages when it comes to delivering high levels of income, or income that grows over time.
If you know which income-paying investment companies you are interested in, visit Income Finder, our set of tools and resources for income-seeking investors. Income Finder allows you to create a virtual portfolio of income-paying investment companies, track the dividend dates and see how much income you could receive over a year.
Something a bit different?
A guide to alternative assets
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:
- Mainstream global companies.
- Companies from specific parts of the world.
- A particular type of company, like smaller companies.
- Particular business sectors, like technology or commodities.
Different types of investment companies, shares and securities
An investment company is a company listed on a stock exchange which invests in shares and other assets, but there are a few different types of investment company to be aware of:
- Investment trusts
- Non-UK investment companies
- Real Estate Investment Trusts (REITs)
- Venture Capital Trusts (VCTs)
Investment trusts are the most common type of investment company. Investment trusts are investment companies which are based in the UK and which meet certain conditions such as paying out a certain amount of the income they receive from their investments.
Non-UK investment companies are very similar to investment trusts, but they are based in areas other than the UK. Many non-UK investment companies are based in the Channel Islands, for example. Because they aren’t based in the UK, investors don’t have to pay stamp duty when they buy non-UK investment company shares.
Many investment companies that invest in property are structured as Real Estate Investment Trusts (REITs). REITs have similar, but different rules to investment trusts. They are companies that:
- Own commercial or residential property and rent it out.
- Have to distribute 90% of the profits they make from their rental business to the REIT’s shareholders.
- Do not have to pay corporation tax on profits from the rental business.
Shareholders in REITs pay income tax, as opposed to dividend tax, on the distributions that are made to them in this way. The general idea is that they are taxed as though they owned the properties themselves. Of course, if REIT shares are held in an account such as an ISA or a SIPP, no tax is paid on the distributions, making REITs a tax-efficient way to invest in property.
Venture Capital Trusts (VCTs) invest in some of the most dynamic small businesses in the UK to help them grow. Because of the economic growth these businesses can create, the government offers generous tax benefits when you invest in VCTs.
To find out more about VCTs, visit the VCT section of the guide.
Different types of shares and securities
There are different types of investment company shares which investors can buy. Most are ‘ordinary’ shares but there a couple of other options. However, different types of shares are specialist investments and investors should do thorough research before investing in them.
Zero Dividend Preference share (zeros or ZDPs)
A type of share which aims to deliver a fixed amount of capital growth over a set period of time. This amount isn’t guaranteed.
ZDPs don’t pay any income.
This type of financial instrument has a limited life and can be converted into new ordinary shares in the company at some time in the future at a fixed price known as the strike price.
Warrants have similar characteristics to subscription shares. They don’t have the same rights as ordinary shares (e.g. they are not entitled to any dividends before they are converted into the ordinary shares). They are also much higher risk than ordinary shares, because if the share price of the ordinary shares is lower than the warrants’ strike price, the warrants will have limited value. So it’s possible for warrants to expire worthless and you could lose all the money you paid for them.
Convertibles are shares or securities which can be converted into ordinary shares at some time in the future.
C (‘Conversion’) shares help an investment company grow in a way that protects the interests of existing ordinary shareholders.
When an investment company wants to grow, it may issue C shares. These shares and the proceeds are held in a separate pool and invested in a portfolio of assets.
After a certain period, or when the pool of new money is fully invested, the two portfolios are merged and the C shares are exchanged for ordinary shares.
The advantage of C shares is that existing ordinary shareholders:
- Don’t have to take up the C share offer if they don’t want to.
- Don’t have their returns affected while they wait for the proceeds of the C share to be invested.
- Don’t bear any of the issue costs.
Why choose investment companies?
Every investment offers benefits and risks. The benefits include the opportunity to grow the value of your money, to generate an income or to diversify your savings. The risks are that you could lose your money or that it might be worth less when you need it.
You should not invest if you cannot afford to lose your money, if you need a guaranteed income or if you’re not prepared to see the value of your investments fall. If you are unsure, it’s important to get independent financial advice.
If you feel that investing with funds could be for you, investment companies have important benefits and risks over open-ended funds which are important to know.
Benefits of investment companies
- Closed-ended structure – this allows the manager to make longer-term decisions, without having to worry about needing to sell assets when investors sell their shares in the investment company.
- Listed on a stock exchange – this offers you the ability to buy and sell shares at any time in normal trading hours.
- Boards of directors – they an additional layer of oversight, protecting your interests.
- Gearing – the ability of investment companies to borrow money to invest means that they may perform better over the long term (but see the risks below).
- Ability to invest in hard-to-sell assets like private equity and infrastructure.
Risks of investment companies
- Gearing – this is likely to make your returns worse in periods when markets go down.
- Discounts – if an investment company discount widens when markets go down, you are likely to suffer a bigger loss than if you had invested in a similar open-ended fund.
Who might investment companies be suitable for?
First of all, investment companies won’t be suitable for you if you can’t accept the usual risks that come with investing, such as losing money, or seeing income from your investments fall.
If you can accept the risks that come with investing, the question still remains: are investment companies the right investments for you?
You need to consider this question carefully, and if in doubt, consult a financial adviser. The following is a general guide only and can’t take into account your individual circumstances.
Investment companies could be suitable for you if you want:
- Strong growth in your investments over the long term.
- An income which rises consistently over time, or a higher level of income.
- An independent board protecting your interests.
- Access to alternative assets like infrastructure or specialist property.
- The ability to buy and sell shares at any time during the trading day.
On the other hand, investment companies will not be suitable for you if you:
- Have an investment time horizon of less than 5 years.
- Need a guaranteed return.
- Need a guaranteed income.
- Can’t accept the risks that come with gearing and discounts.
- Want an investment where the price always matches the value of the underlying assets.
Choosing an investment company
Choosing an investment company
Before you start thinking about what to invest in, it’s important to know what you are investing for. Is it for income in retirement perhaps, or maybe to grow wealth for a pension or to build a nest egg for children?
If you don’t know yet, have a look at section one of this guide How to get started.
If you know your goals and have decided you’d like to invest in an investment company, it’s important that you don’t choose one based on its past performance. If an investment company generated a return in the past, or produced an income, that’s not a guarantee it will do the same in future.
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.
- Its charges.
- Your own investment objectives.
- How risky it is likely to be. You could assess this in a few ways:
- Its approach to gearing (borrowing money to invest).
- How concentrated or diversified its portfolio is.
- What it invests in.
- How volatile its share price tends to be.
Investment company performance figures and what they mean
Where possible, the AIC gives past performance figures for every member investment company listed on this website.
An investment company’s performance can be measured in two ways and the AIC’s website shows both:
- Share price total return (%) – This is the performance of an investment company’s shares. It is the return investors receive and it takes into account any discount or premium.
- NAV (net asset value) total return (%) – This is the performance of an investment company’s underlying portfolio. It doesn’t take any discounts or premiums into account. As discounts and premiums reflect investor sentiment rather than performance, NAV returns tend to be used by investment company boards and analysts to judge performance.
A total return measure means any dividends received have been reinvested.
Share price total return and NAV total return take some costs into account. The costs of running the investment company such as fund manager fees and accounting costs are reflected in the performance figures.
Costs which the investor pays which are external to the investment company such as Stamp Duty or fees for buying and selling investment company shares are not included.
Most investment companies have a benchmark which they use to measure their performance. At the end of an investment company’s financial year for example, the board will report on whether it beat or underperformed its benchmark.
The benchmarks used are often indices which match the investment company’s investment strategy, the FTSE 100 or FTSE SmallCap, for example.
You can normally see how an investment company has performed against its benchmark on its monthly factsheet. Investment company factsheets are available on the AIC’s website.
Want to see past performance figures?
Search for a investment company in Find and compare investment companies.
The AIC classifies investment companies into different sectors to help you find and compare them.
Why is sector classification important?
When you’re choosing an investment company, the range of choices can be baffling. It helps if you narrow them down to options 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 more generalist 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. Bear in mind that specialist investment companies can be more risky as they focus on one particular investment area.
As well as helping you to locate investment companies you’re interested in, sectors also make it easy to compare the performance and costs of investment companies with similar objectives. For example, you wouldn’t compare an investment company that invests in UK equities with another investment company that invests in Vietnamese property. Sectors allow you to compare apples with apples.
What do the AIC sectors mean?
The AIC classifies all investment companies into sectors. The classifications provide a way of grouping companies with common characteristics to make it easier to search and compare within particular sectors.
Sector classifications are usually based on one of the following:
- Regional focus. For example, Japan.
- Industry focus. For example, Biotechnology and Healthcare.
- The company's investment objective. For example, UK Equity Income.
There are rules to determine which investment companies go in which sectors, but no two companies are ever the same and there can be a lot of variation within a sector. It’s also important to remember there are no guarantees that investment companies will meet the objectives that apply to their sector.
Costs are an important consideration when investing. The greater the costs, the harder your investments have to work to deliver you a return.
Typically, there are two types of costs when investing in investment companies:
- Internal costs. These are the costs and charges of the investment company itself, for example the annual management fee that goes to pay the fund manager.
- External costs. These are costs and charges outside the investment company, for example, dealing commission when you buy and sell investment company shares.
The internal and external costs together add up to your total cost of investing.
Internal costs: the costs of running an investment company
Internal costs are paid out of the assets of an investment company. For most investment companies, they are likely to include the following:
- An annual management charge paid to the fund management group that manages the portfolio of the investment company from day to day. Most annual management charges fall somewhere between 0.5% and 1.5%. Some investment companies will also pay the fund management group a performance fee if the company’s performance exceeds an agreed target.
- Transaction costs when the fund manager buys and sells assets within the investment company’s portfolio.
- Gearing costs, if the investment company uses gearing. This might be, for example, interest paid on a bank loan that the investment company has taken out.
- Fees of professional services firms such as accountants and lawyers.
- The fees of the board directors.
- Costs of holding shareholders’ meetings.
- Costs of producing the annual and semi-annual report and other shareholder communications.
- Other administration costs.
You can find out about all the costs incurred by an investment company in its annual accounts.
When you see performance figures quoted for an investment company, all these costs will already have been taken out. You are seeing the net figure (after costs).
External costs: costs outside the investment company
External costs are paid directly by you, the investor. They don’t come out of the assets of the investment company.
Typical external costs might include:
- Dealing commission when you buy or sell shares using a platform or broker. This varies considerably but a typical amount would be approximately £10 per buy or sell.
- Dealing spread. This is the difference between the ‘buy’ price and the ‘sell’ price (known as ‘bid’ and ‘offer’).
- Stamp duty when you buy shares in UK-based investment companies. This is 0.5% of the purchase amount, and is paid only when you buy (not when you sell). So when you buy £100 of shares you pay 50p stamp duty.
- Any other taxes you have to pay on income or gains.
- Platform charges. Most investors now hold their investment company shares on platforms. On a platform, you’ll typically pay admin charges as well as dealing commission. The AIC offers comprehensive data on charges for holding investment companies on platforms.
- The cost of financial advice, if you are using an adviser.
Two people investing in the same investment company will pay the same internal costs, but their external costs might be very different depending on the platform or broker they use, whether or not they use a financial adviser, and their tax position.
Where do I find out about costs?
You can find out about the internal costs of investment companies on this website. We can’t provide comprehensive information on external costs, as they depend on the investor’s choices, such as how often they buy and sell shares, but we do maintain cost comparison tables which give you an idea of what platforms will charge you to buy, sell or hold investment companies.
When it comes to internal costs, you can look up the AIC ongoing charge for any member investment company.
The AIC ongoing charge
The AIC ongoing charge has been designed to make it easy for you to compare the costs of investment companies with other funds, such as open-ended funds. It is made up of the regular, recurring costs of running an investment company, such as:
- The annual management charge.
- Fees of professional services firms, such as auditors.
- The fees of board members.
- Administration costs.
The AIC ongoing charge is backward-looking. It calculates costs for the last financial year, and divides these by the net assets of the company to produce a percentage figure. See exactly how the AIC ongoing charge is calculated.
The AIC ongoing charge does not include performance fees. On this website, you can find a figure called AIC ongoing charge plus performance fee, which includes the performance fees paid in the last financial year. Where this figure is the same as the AIC ongoing charge, it means no performance fees were paid.
Finally, you’ll find details of the management agreement between the investment company and its manager, which sets out what annual charges apply, and whether there is a performance fee.
The AIC ongoing charge does not include transaction costs, which are the costs paid when a fund manager buys or sells assets within the investment company’s portfolio. It also excludes gearing costs.
Charges on Key Information Documents
Since 1 January 2018, investment companies have been required to produce Key Information Documents (KIDs). The charges disclosed on these KIDs vary from the AIC ongoing charge.
There are two main differences between the KID charge and the AIC ongoing charge:
- KID charges attempt to be forward-looking, to give you an idea of what you may pay in future, whereas the AIC ongoing charge gives you the real costs paid in the previous financial year.
- KID charges include transaction costs, gearing costs and performance fees (where paid), which are not included in the AIC ongoing charge.
The AIC believes that there are various problems with KIDs. One of these is that open-ended funds do not have to produce KIDs until 2022. In the meantime, they will continue to produce a different sort of document called the Key Investor Information Document (KIID), which discloses charges on a different basis.
KIDs and KIIDs may sound similar, but in reality the cost disclosures on the two documents are very different. This raises the risk of misleading “apples and pears” comparisons being made between the costs of investment companies and open-ended funds.
The AIC will continue to display the AIC ongoing charge on its website, to allow investors to make informed comparisons between the costs of investment companies and those of open-ended funds.
How can I keep my costs down?
Costs have a big impact on investing, especially over long periods. Let’s say you invested £10,000 for ten years and markets returned 6% a year. If your charges were 0.5%, your return would be £17,081 over the ten-year period. But with charges of 1%, your return goes down to £16,289 – a difference of £792.
When you choose an investment company, you should carefully consider that company’s costs. Bear in mind that investment companies that invest in more specialist assets (such as property, private equity or infrastructure) are likely to have higher charges than those that invest in more conventional assets such as shares or bonds. So it may help to compare an investment company’s charges with others in its AIC sector.
Another tendency is for larger investment companies to have lower costs than smaller ones. This is due to economies of scale, which are often passed on to shareholders as companies grow.
Remember that external costs, such as platform costs, matter too. You can compare the costs of different platforms when holding investment companies on this website.
How to invest
Ways to invest
Investing in an investment company means buying its shares on the stock exchange. There are various ways to go about it.
- Investing with or without financial advice.
- Investing regularly (e.g. monthly), or in lump sums now and then.
- Investing within a special account - like an Individual savings account (ISA) or Self-invested personal pension (SIPP).
- If you invest without advice you’ll need to select your own investment company. You can do this by buying your shares directly through an investment platform.
Instead of investing a lump sum you can choose to invest regularly – as little as £30 per month.
Investing regularly is one way of reducing the risk of investing in the stock market. To understand why, imagine that you have a large lump sum to invest. If you invest this sum just before markets fall, you’ll immediately suffer a loss. Splitting that lump sum into several smaller amounts means that if markets do fall, you’ll benefit from investing some of the money at lower share prices.
This effect is sometimes called ‘pound-cost averaging’. This means that when prices are high you’ll buy fewer shares and when prices are low you’ll buy more shares, but because you’re investing regularly the difference will even itself out.
ISAs, Junior ISAs and Self-invested personal pensions (SIPPs)
These aren’t investments in themselves. Instead, they’re accounts in which to buy and hold stocks and other investments. Often they offer tax breaks to encourage people to save and invest.To find out more, visit the pages on ISAs, Junior ISAs and Self-invested personal pensions (SIPPs).
Getting financial advice
If you’re not sure whether investment companies are for you, the right financial adviser can help.
- What types of financial adviser are there?
- What advice do they give?
- What does advice cost?
- Finding an adviser.
- Preparing to talk to your adviser.
What types of financial adviser are there?
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. If an adviser calls themselves independent and does not recommend investment companies, you should ask why.
Advisers must be registered with the Financial Conduct Authority (FCA) and may also belong to a professional body like The Chartered Institute for Securities & Investment (CISI). They need to have minimum qualifications and have a duty to maintain their professional competence.
Some financial advisers call themselves financial planners. This means they are likely to put a lot of emphasis on how you manage your income and expenditure through your life to meet your personal and financial goals.
What advice do they give?
An independent financial adviser’s job is to offer impartial 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 any investment they might recommend.
- By seeing an adviser you are making no commitment to buy anything.
What does advice cost?
Advisers must charge you directly for their advice – they are not allowed to accept commission, which could influence the products they recommend.
The website Unbiased.co.uk suggests that the cost of financial advice can vary from £500 to £5,000 or more depending on the adviser and the type of advice. Frequently, advisers charge a percentage of the assets that they advise on, which could be 1 or 2%.
Many financial advisers are happy to have an initial phone conversation or meeting with you without any charge: however, you’ll need to check this with each firm.
Finding an adviser
There are several organisations which can give you details of advisers in your area. (Because these are not AIC sites we can’t vouch for their accuracy.)
Unbiased.co.uk promotes the value and accessibility of independent financial advice to the public.
Findanadviser.org is a website run by The Personal Finance Society, the professional body for financial advisers.
Preparing to talk to an adviser
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.
Most individual savers will need to use a platform to invest in investment companies.
Platforms are online services that allow you to buy, hold and sell investment company shares. They also allow you to hold other investments such as individual company stocks and open-ended funds, so you can manage all your investments in one place.
Many platforms offer you the ability to hold your investments inside an ISA, SIPP or Junior ISA. All platforms will also offer an ordinary trading account with no special tax benefits (sometimes called a “general investment account”).
How to choose a platform
Before you choose a platform, think about these questions:
- Does the platform offer all the investments you want to buy? (Note that a few platforms do not offer investment companies).
- Does the platform offer you the tax wrapper(s) you need, such as an ISA, SIPP or Junior ISA?
- What are the platform’s costs? (Such as dealing fees and annual admin charges.)
- Does the platform provide other services that you may need? (Such as telephone dealing).
If you can, it is a good idea to talk to someone who already uses the platform.
The AIC publishes a range of information that is designed to help investors choosing a platform.
Alternatives to platforms
A few investment company managers offer savings schemes. Like platforms, these schemes have their own costs and charges. Unlike platforms, they will typically be limited to the investment companies managed by the group that runs the scheme.
ISAs, SIPPs and saving for children
Individual Savings Accounts (ISAs)
Getting more from your savings
A guide to ISAs.
ISAs are a tax-efficient way to save or invest up to £20,000 this tax year, with a huge range of investment options to choose from.
ISAs were launched in 1999 and have become one of the most popular ways to save. It’s easy to see why. ISAs allow your savings and/or your investments to grow free from tax. You pay no income or capital gains tax on the investments you hold in them and you don’t even have to declare the ISA on your tax return.
You can hold two main types of investments in ISAs:
This includes bank and building society savings accounts and National Savings. Cash ISAs provide a very safe home for your money but can offer limited income and growth prospects.
Stocks and shares
This includes shares and collective funds such as investment companies, unit trusts and other similar funds. Stocks and shares ISAs are more risky, but can offer the chance of better returns over the long term.
Self-Invested Personal Pensions (SIPPs)
Taking control of your future
A guide to Self-Invested Personal Pensions.
Saving for your retirement could well be the biggest financial commitment you will ever make. As the name suggests, self-invested personal pensions (SIPPs) give you a high degree of freedom to choose the investments that go into your pension. SIPPs are generally for more experienced investors who have larger sums to invest. If you are less experienced, you may be better off with another type of pension, such as a Stakeholder Pension.
Saving for children
Saving for your children's future?
Discover how investment companies can help.
Because of their strong long-term performance record, investment companies are a good option to consider when you invest for a child.
Going for Growth
A guide to Venture Capital Trusts.
- What are Venture Capital Trusts?
- VCTs invest in small companies
- VCTs are high risk
- Types of VCT
- VCTs and tax
- Tax benefits when you buy new VCT shares from the manager
- How VCTs differ from other investment companies
- Non-qualifying investments
- Valuing the underlying portfolio
Venture Capital Trusts (VCTs) invest in 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 UK companies which are not usually quoted on the stock market.
- VCTs are higher risk than most other investment companies because of the companies they invest in.
- VCTs should be viewed as long-term investments. New VCT shares bought directly from the manager are only eligible for the full set of tax reliefs if they are held for five years.
- 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 to other investors on the stock market as you would with other shares, although some VCTs offer a ‘buy-back’ facility.
- VCTs are generally more suitable for experienced investors, as they are 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 and industrial change.
- 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.
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.
The table below shows the current tax benefits available on VCT shares:
|Tax free capital gains||Yes|
|Rate of income tax relief of subscription||30%|
|Maximum investment eligable for income tax relief||£200,000|
|Minimum time investor must hold VCT to qualify for income tax relief||5 years|
|Tax free dividends||Yes|
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 the 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 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 80% of their investments must be in qualifying investments – small companies (maximum £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 20% of a VCT’s money is usually invested in cash but can be invested in other investments. 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.