What you need to know before you invest

Although there are many funds available, most of them invest in one or more of four investment categories, known as asset classes.

You should think about investing in a variety of asset classes, and a range of investments within each class.

The main asset classes are:

Equities (also known as stocks or shares)

Investing in equities means you have part ownership on a company. Although they can offer good growth potential, their value can rise or drop sharply at any time. Therefore, equities should normally be viewed as a long-term investment.

Bonds

Bonds are essentially loans to a Government or company. These loans are often for a set time period and the bond owner usually receives regular interest payments. Some bonds are riskier than others, for example, bonds issued for a longer time period or by companies which are viewed as risky.

Money Market Instruments (including cash)

Money market instruments include deposits with banks and building societies, as well as Government and large corporations. They also include other investments that can have more risk and return than standard bank deposits. Although these are seen as lower risk options, money market instruments can sometimes fall in value.

Property

Property investing includes direct investments in buildings and land, as well as indirect investments such as shares in property companies. Bear in mind that if you invest in property, you might not be able to sell when you want to or get the price you were hoping for.

Other

There are also investments that don't fit into one of these asset class categories. They include direct and indirect investments in real assets like commodities, for example oil or precious metal, and absolute return strategies. There's a variety of absolute return strategies, but in general they aim to give a positive return, regardless of what's happening in the markets. They tend to use derivatives, so funds that include absolute return strategies may have different risks to other funds.

For more information about asset classes, have a look at How to choose the right investment options for your pension (PDF, 740kb).

Remember, there are no guarantees with investments. The value of an investment can go down as well as up and may be worth less than what was paid in.

Once you’ve chosen the types of investments you’d like to put your money into, you then need to decide how you’d like the money to be looked after.

These are some of your options:

Passive

A passive investment aims to track or replicate the performance of an index or indices, for example the FTSE® 100. Generally, if the index your investment tracks performs well, then so should your investment – and vice versa. Passive funds usually have lower charges than other types of funds.

Active

Active investments aim to outperform the market, by investing in companies that the fund managers believe will provide higher than average returns. However, returns are not guaranteed, and there is a chance of poor performance. These investments can go down in value as well as up, more than passive investments, and are usually more expensive.

Managed

These funds are normally managed by a single fund manager. The fund manager will choose the mix of assets that make up the fund (for example how much to invest in equities or bonds). Different funds will use different mixes of assets depending on their risk and return objectives.

If you've narrowed down your choices and just need to decide between funds, there are a few things you should consider before you make your final decision.

Fund objectives

All funds have objectives - and you can check to see what a fund's objectives are, and if it has met those objectives in the past, on its fact sheet.

Past performance

It can be helpful to compare the past performance of different funds. You can find past performance information in the fact sheet for the fund.

Please remember that just because a fund has performed well in the past, there's no guarantee that it will continue to do so.

You must also remember that there are no guarantees with investments. Their value can go down as well as up and they may be worth less than what was paid in. This can particularly be the case if you have to cash your investments in while the markets are depressed.

What does it cost?

When you have a pension there are charges for investing in funds. These charges cover the cost of managing your investments.

The amount you will be charged depends on the investments you choose. Find out more about charges here.

Fund switching

There may also be charges for switching funds.