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Passive/Index tracker funds

An index tracker fund does what it says on the tin — it tracks an index. A stock market index is simply a representation of the performance of a particular section of the market. You can read our full guide on market indices here. 

These index trackers are not attempting to outperform the market, but mirror its performance. As a result, the ongoing charge for fund management is often lower. This makes them a good option for investors who are looking for a long-term, low cost option. 

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Actively managed funds

When a fund is actively managed, the investments are selected by a fund manager. The goal here is to try and outperform the market, although this is not guaranteed. 

The ongoing costs of an actively managed fund are generally higher than one that is passively managed. It’s worth considering these added fees, as once they’ve been factored in, this can have a substantial impact on overall returns over time. 

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Ready-made funds

A ready-made fund is a pre-built portfolio that caters to a particular risk level. Fund providers will usually offer several ready-made options, constructed of different asset classes.

For example, a more cautious ready-made fund might be made up of a mix of bonds and equities, whereas a riskier option might be solely invested in equities. 

These funds are a great option for a simpler investment strategy, where regularly reviewing and rebalancing your portfolio is not your thing. 

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Thematic funds

Thematic funds invest in a specific theme or trends. For example, AI, healthcare, or clean energy. These funds are an attractive option for investors who believe that a particular sector is experiencing, or may experience, strong growth. 

As a result of these funds being tied to the performance of one area of the market, these funds often come with a higher risk level. Gains can potentially be very lucrative relative to broader market performance, but similarly if an industry suffers, the losses can be significant. 

Confidence in thematics can change very quickly, and often respond to global events, so these funds are better suited to more experienced investors. 

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Bond funds

A bond fund (fixed interest security) is made up of government or corporate bonds. A bond is a loan that you, an investor, give to a government or company and is repaid on maturity.

A bond ETF is continuously buying and selling bonds, and unlike purchasing an individual bond, your original investment is not returned to you when it matures. 

The benefit of using a bond ETF, is they hold multiple bonds, making your investment more diverse. You are also not tied to a fixed term, so you can sell your investment whenever you like. 

Bonds are typically lower risk than owning equities, however, lower returns can often mean the value of your investment is eroded by inflation. 

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Commodities

An Exchange Traded Commodity (ETC) tracks the price of physical commodities such as gold, silver, oil and agricultural products.

They work in a similar way to Exchange Traded Funds (ETFs), but track commodities instead of shares and bonds. ETCs are also traded on a stock exchange, making them easy to buy and sell. 

Physical commodities such as gold and silver are backed by real bullion in vaults, and move with the commodities market price.

This can be an attractive aspect of commodities to some investors, as unlike company shares, the commodity is tangible and is not tied to a company’s success or failure. 

Commodities are still a riskier asset, as their market price is still tied to a market price, and can be affected by global events, for example, the effect of a conflict on global oil prices. 

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation. The value of investments that are not in pound sterling may be affected by changes in exchange rates.