Pooled investment schemes

Investing in one or more asset classes

Investing in funds provides a simple and effective method of diversification. Because your money is pooled together with that of other investors, each fund is large enough to diversify across hundreds and even thousands of individual companies and assets. A pooled (or collective) investment is a fund into which many people put their money, which is then invested in one or more asset classes by a fund manager.


There are different types of pooled investment but the main ones are:

Open-ended investment funds
Unit trusts
Investment trusts
Investment bonds

Good return for investors

Most pooled investment funds are actively managed. The fund manager researches the market and buys and sells assets to try and provide a good return for investors.

Trackers, on the other hand, are passively managed, they simply aim to track the market in which they are invested. For example, a FTSE100 tracker would aim to replicate the movement of the FTSE100 (the index of the largest 100 UK companies).

They might do this by buying the equivalent proportion of all the shares in the index.

For technical reasons the return is rarely identical to the index, in particular because charges need to be deducted.

Actively managed fund

Trackers tend to have lower charges than actively-managed funds. This is because a fund manager running an actively-managed fund is paid to invest so as to do better than the index (beat the market) or to generate a steadier return for investors than tracking the index would achieve. Of course the fund manager could make the wrong decisions and under-perform the market. And there is no guarantee that an actively-managed fund that performs well in one year will continue to do so. Past performance is no guarantee of future returns.

Trackers do not beat or under-perform the market (except as already noted), but they are not necessarily less risky than actively-managed funds invested in the same asset class. Open-ended investment funds and investment trusts can both be trackers.




Open-ended investment funds

Open-ended investment funds are often called collective investment schemes and are run by fund management companies. There are many different types of fund.

These include:

Unit trusts

OEICs (Open-Ended Investment Companies, which are the same as ICVCs – Investment Companies with Variable Capital)

SICAV (Société d’Investissement à Capital Variable)

FCPs (Fonds Communs de Placement)

This list includes certain European funds, which are permitted under European legislation to be sold in the UK.

Open-ended funds
There are many funds to choose from and some are valued at many millions of pounds. They are called open-ended funds as the number of units (shares) in issue increases as more people invest and decreases as people take their money out.
As an investor, you buy units/shares in the hope that the value rises over time as the prices of the underlying investments increase. The price of the units depends on how the underlying investments perform.

You might also get income from your units through dividends paid by the shares (or income from the bonds, property or cash) that the fund has invested in. You can either invest a lump sum or save regularly each month.

Different asset classes
Open-ended investment funds generally invest in one or more of the four asset classes – shares, bonds, property and cash. Most invest primarily in shares but a wide range also invest in bonds. Few invest principally in property or cash deposits. Some funds will spread the investment and have, for example, some holdings in shares and some in bonds. This can be useful if you are only taking out one investment and, remembering that asset allocation is the key to successful investment, you want to spread your investment across different asset classes.

The level of risk will depend on the underlying investments and how well diversified the open-ended investment fund is. Some funds might also invest in derivatives, which may make a fund more risky. However, fund managers often buy derivatives to help offset the risk involved in owning assets or in holding assets valued in other currencies.

Trustee or depository protection
Any money in an open-ended investment fund is protected by a trustee or depository, who ensures the management company is acting in the investors’ best interests at all times.

For income, there is a difference in the tax position between funds investing in shares and those investing in bonds, property and cash. Whichever type of open-ended investment fund you have, you can reinvest the income to provide additional capital growth, but the taxation implications are as if you had received the dividend income.

No capital gains tax (CGT) is paid on the gains made on investments held within the fund. But, when you sell, you may have to pay capital gains tax.

Building an effective portfolio involves receiving professional advice to ensure that your portfolio suits your attitude to risk. To discuss your requirements, please contact us.

Individual Savings Accounts

The end of the 2009/10 tax year is rapidly approaching and now is the perfect time to consider your Individual Savings Account (ISA) options. These tax-efficient wrappers are a popular and simple way to save, as you don’t pay any personal income tax or capital gains tax on any profit you may make.

ISAs were introduced by this government in April 1999 to replace Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs) as a tax-efficient way to encourage people to save over the medium- to long-term.

What can you save or invest in an ISA?

ISAs can be used to:

save cash and the interest will be tax-free

invest in shares or funds – any capital growth will be tax-free and there is no further tax to pay on any dividends you receive

Savers born on or before 5 April 1960 (that is, aged 50 or over during the current tax year) can save up to £10,200. The full £10,200 can be invested in a stocks and shares ISA with one provider or up to £5,100 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same provider or another.

Savers who were born after 5 April 1960 can save up to £7,200. The full £7,200 can be invested in a stocks and shares ISA with one provider or up to £3,600 can be saved in a cash ISA with one provider, with the remainder being saved in a stocks and shares ISA with either the same or another provider. From 6 April this year, the ISA limit will increase to £10,200, up to £5,100 of which can be saved in cash for all ISA investors.

According to the age 50 rule, someone who is currently under age 50 but who will reach age 50 between 6 October 2009 and 5 April 2010 will only be able to pay in more than £7,200 during the 2009/10 tax year (up to a maximum of £10,200) once they have attained their 50th birthday. So, for example, if an investor will not attain age 50 until 1 March 2010, they will not be able to pay in more than £7,200 until 1 March 2010.

Transferring money from cash ISAs to stocks and shares ISAs

If you have money saved from a previous tax year, you can transfer some or all of the money from a cash ISA to a stocks and shares ISA without this affecting your annual ISA investment allowance. However, please remember that once you have transferred your cash ISA to a stocks and shares ISA it is not possible to transfer it back into cash.

How much tax will you save?

Interest and dividends from savings:

if you pay tax at the basic rate, outside an ISA you would usually pay 20 per cent tax (2009/10) on your savings interest

if you pay tax at the higher rate, outside an ISA you would usually pay tax at 40 per cent on your savings interest

if you pay the ‘savings rate’ of tax for savings, outside an ISA you would pay tax at 10 per cent on your savings interest

if you’re a basic rate taxpayer inside or outside an ISA you pay tax at 10 per cent on dividend income. This is taken as a ‘tax credit’ before you receive the dividend and cannot be refunded for ISA investments

if you’re a higher rate taxpayer you would normally pay tax on dividend income at 32.5 per cent. In an ISA you won’t get back the 10 per cent dividend tax credit element of this, but you will save by not having to pay any additional tax

Capital Gains Tax (CGT) savings
If you make gains of more than £10,100 from the sale of shares and certain other assets in the tax year 2009/10, you would normally have to pay CGT. However, you do not have to pay any CGT on gains from an ISA.

The value of your investment can go down as well as up and you may not get back the full amount invested.