Equities:
Equity funds invest in the UK or global stock exchanges. An individual equity fund will hold many stocks, often from a diverse range of sectors. They may track a certain stock index, so the performance of the index will be reflected in the performance of the fund, or they may be actively managed and seek to outperform a set benchmark. The success of an equity fund relies on the success of the stocks it possesses. Historically, equities have a higher volatility than other asset classes.
Bonds:
A bond is a debt security where the issuer owes the holders a debt. It can be considered as a type of loan between the issuer and the holder. Bonds are a formal contract to repay borrowed money with interest at fixed intervals. The main difference between bonds and stocks is that stockholders have an equity stake. They own part of the company whereas bondholders are effectively lenders. Also, bonds usually have a defined term rather than stocks which can be outstanding indefinitely.
Generally speaking, bonds (especially short and medium dated) are less volatile than stocks and are often considered a safer investment. This is due to the legal protection given to bond holders and bonds’ interest payments are often higher than the general level of dividend payments.
Property:
Property funds invest in land, property or real estate to either hold or lease the property to yield an income. Funds could invest in both residential and commercial property, and gain a source of income through renting out the property on the market. Just as with equities, the actual capital value of a property can change, so that even if a property holder receives a high level of rent, the value of his investment may decrease.
Composite ('Multi-asset') funds:
Composite funds will invest in all or some of the various other asset classes. The proportion of each asset class will differ between funds and may change depending on the fund manager’s investment strategy.
Absolute return funds:
Absolute return funds may invest in hedge funds, to secure the type of return they require. By ‘hedging’ their assets in derivatives and short-sales, hedge funds aim to secure their investment against future fluctuations in the market, or protect themselves against future changes by trading in futures markets, or other derivative products. Hedge funds themselves are likely to invest in several different asset classes.
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