Common Investing Vehicles

Most people use some sort of investment vehicle that invests on their behalf. Here we review some of the most common ones:

Unit Trusts, OEICs, ETFs and Investment Trusts

Yikes, jargon alert! Don’t panic, though. These are all just types of funds that predominantly invest in shares. Some of them may invest in a particular industry, country or region, whilst others may cover the whole globe. They are also responsible for most of the colourful adverts in the weekend papers. These are the most flexible type of product, allowing you to get your money out at any time.

The charges for ETFs and investment trusts tend to be lower so, given the choice, we prefer them over unit trusts or OEICs.

Pensions

A pension is basically a tax-efficient method of investing in shares, bonds, property and cash. You get tax relief on money you invest in a pension but there is a catch. In fact, there are three of them.

First, you generally can’t touch your money until you are at least 55. Secondly, even though it’s no longer compulsory, you may have to use your money to buy an annuity, which means you give up your capital in return for regular income. Lastly, the rules regarding pensions keep on changing, making it more difficult to know where you stand.

A pension is usually seen as the standard way to save for your retirement but in reality it is just one of the options. Unfortunately, their obscure nature and inflexibility means that the charges on them tend to be quite high.

Structured products

These sort of investments have been growing in popularity in recent years. They often last for a fixed period, like five or seven years, and their value is linked to a stock market index, like the FTSE 100. They usually offer to limit your downside, with a guarantee that you will at least get your money back after the fixed investment period has ended.

What’s the catch, you might ask? Well, although these funds can limit any losses, your potential for gains also tends to much more limited than with a direct investment in the stock market. In short, we’re not fans.

ISAs

Like a pension, an ISA is a tax-efficient wrapper. You can put investments in it, like cash, or a fund like an unit or investment trust.

Like you, we quite like paying less tax. So there’s a good chance that whatever we decide makes a good first investment, we’ll want to protect it in an ISA.

With-profits and endowment policies

These products have been much criticised in recent years. And rightly so. As a new investor, you’re far less likely to be offered one these days, because they have fallen so much out of favour. But we think they are worth mentioning, mostly as an illustration of how not to invest.

With-profits and endowments tend to be highly inflexible beasts that require you to commit to investing a regular amount over a long time. While that’s no bad thing in itself, if you do not manage to keep up the payments for some reason, you can end up paying heavy penalties as a result and these can significant reduce any returns you make.

These products tend to be ‘sold’ rather than being bought. Like pensions, their inflexibility and lack of transparency means they offer boast high charges.

With-profit bonds attempt to smooth out the return of the stock market by awarding annual bonuses that cannot be taken away. But the largest bonus is kept right until the end and many people don’t get that far.

In short, best avoided.

So, where should you start?

We think a first investment should be something simple, flexible and low cost. Given the choices above, you can probably tell we’re leaning towards a fund, like an ETF or investment trust, probably within an ISA.


 

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