Choosing the right type of investment fund can make a major difference to your long-term returns, tax efficiency, and risk exposure. With interest rates expected to stabilise and inflation averaging around 3% in 2025, understanding how different funds work helps investors strike the right balance between growth and stability.
This guide explains the main fund categories available to UK investors, including active and passive strategies, income versus accumulation funds, and how legal structures like ETFs, OEICs and unit trusts operate. Clear tables and examples will help you compare risk, cost, and accessibility before investing.
At a Glance
- Investment funds pool money from multiple investors to buy a diversified range of assets such as shares, bonds, or property.
- Funds vary by strategy, management style, and structure: each with different costs, risks, and levels of control.
- Active funds aim to outperform the market; passive funds track it at lower cost.
- Investors can choose between income funds (paying dividends) or accumulation funds (reinvesting profits).
- Funds can be held in tax-efficient accounts like ISAs or pensions to reduce tax on gains and income.
What Are Investment Funds?
An investment fund pools money from many investors and uses it to purchase a diversified portfolio of assets such as shares, bonds, or property.
This collective approach allows individual investors to access professional management and diversification that might otherwise be difficult or costly to achieve independently.
In simple terms, investing in a fund means owning a proportional share of its total assets, and your returns depend on the fund’s performance.
Types of Funds: The Main Categories
Investment funds can be classified in several ways, usually by;
- investment strategy
- management style
- legal structure
Understanding these distinctions helps you choose the right fund for your goals, risk tolerance, and time horizon.
Active vs Passive Funds
In 2025, both active and passive funds remain popular. Active funds are managed by professionals aiming to outperform an index through research and stock selection.
Passive funds (or trackers) on the other hand aim simply to replicate a market index such as the FTSE 100 or MSCI World, providing broad exposure at low cost.
While passive funds often have fees under 0.2%, active funds may charge 0.5–1% or more. Historical data shows that most active funds underperform comparable indices over long periods, but they may still appeal to investors seeking specialist strategies or sustainability themes.
| Fund Type | Description | Potential Advantages | Key Considerations |
| Active Funds | Managed by professionals seeking to beat the market. | Potential to outperform benchmarks, flexibility in strategy. | Higher fees, performance depends on manager skill. |
| Passive Funds | Track a specific index automatically. | Lower costs, transparent and easy to follow. | Cannot outperform the market, returns mirror the index. |
Income vs Accumulation Funds
Funds also differ by how they handle income generated from their investments.
Income (Inc) funds distribute dividends or interest directly to investors, ideal for those seeking regular cash flow. Dividends within ISAs or pensions remain tax-free, while income in a General Investment Account (GIA) may be taxable once you exceed the £500 dividend allowance (2025/26).
Accumulation (Acc) funds reinvest income automatically, compounding returns over time. They suit long-term investors focused on growth rather than income.
| Fund Type | Income Treatment | Best For | Considerations |
| Income (Inc) | Pays out dividends or interest to investors. | Retirees or those seeking regular income. | Income may fluctuate; reinvestment is manual. |
| Accumulation (Acc) | Reinvests earnings automatically into the fund. | Long-term investors focused on growth. | No regular income payments. |
Types of Funds by Investment Strategy
Different funds focus on different types of assets or markets.
| Fund Type | Description | Risk Level | Typical Objective |
| Equity Funds | Invest mainly in company shares to achieve long-term growth. | Medium to high | Capital growth through stock appreciation. |
| Fixed Income Funds | Invest in bonds and debt instruments for stability and income. | Low to medium | Regular interest income and capital preservation. |
| Money Market Funds | Hold short-term, low-risk debt (e.g. Treasury bills). | Low | Capital protection and liquidity. |
| Asset Allocation Funds | Combine equities, bonds, and cash. | Medium | Balanced risk and return for diversified investors. |
| Index Funds | Mirror the performance of a market index. | Depends on index | Market-level returns at low cost. |
| Global Funds | Invest in assets from multiple regions. | Medium to high | Geographic diversification and access to global growth. |
| Infrastructure Funds | Focus on assets like transport, utilities, and energy. | Medium | Stable long-term cash flows and inflation protection. |
Modern Investment Funds: ESG and Thematic Funds
As investing evolves, more UK investors in 2025 are seeking funds aligned with long-term global trends or specific values. These approaches, often called sustainable or thematic investing, allow investors to combine growth potential with purpose.
Sustainable or ESG Funds
ESG funds (Environmental, Social and Governance) invest in companies that meet certain sustainability standards and exclude sectors such as tobacco, weapons, or fossil fuels in favour of those with strong governance and environmental policies.
ESG funds can appeal to investors looking to make a positive impact without compromising on long-term returns.
Thematic Funds
Thematic funds focus on specific long-term growth themes rather than traditional sectors or regions. Popular themes in 2025 include artificial intelligence, clean energy, healthcare innovation, and digital infrastructure.
These funds allow investors to target potential high-growth industries expected to shape the future economy, but they also tend to be more volatile and concentrated than diversified index funds.
Target-Date (also called Lifecycle Funds)
Target-date funds, sometimes called lifecycle funds, automatically adjust their asset mix over time to match an investor’s expected retirement year.
Early in the investment period, they hold a higher proportion of equities for growth. As the target date approaches, the fund gradually increases its allocation to bonds and cash to reduce volatility and protect capital.
These funds are widely used in workplace pension schemes and Self-Invested Personal Pensions (SIPPs), offering a convenient, hands-off way to manage risk through different life stages.
Types of Funds by Legal Structure
Funds are also classified by how they are legally set up and traded in the UK.
| Fund Type | Legal Form | Trading | Key Features |
| Unit Trusts | Trust-based, open-ended. | Priced once daily. | Investors buy “units”; price based on net asset value; regulated by FCA. |
| OEICs (Open-Ended Investment Companies) | Corporate structure, open-ended. | Priced daily. | Most common retail fund type; simple, transparent, FCA regulated. |
| ETFs (Exchange-Traded Funds) | Corporate, open-ended. | Traded throughout the day on exchanges. | Combine diversification of funds with flexibility of shares. |
| Investment Trusts | Corporate, closed-ended. | Traded on stock exchanges. | Can trade at discount/premium to underlying assets. |
| Hedge Funds | Can be open- or closed-ended. | Restricted access. | Use complex strategies; typically higher risk and for sophisticated investors. |
Key Takeaways
- Investment funds provide diversification, professional management, and simple access to markets.
- Active funds may outperform in specific conditions but carry higher fees; passive funds offer lower costs and predictability.
- Choose income or accumulation share classes based on whether you prefer cash flow or compounding.
- Understand the fund’s legal form and trading method (OEIC, ETF, trust) as this affects liquidity and pricing.
- Always review fees, performance, and risk level in context with your investment horizon and tax wrapper (ISA, pension, or GIA).
FAQ
Active funds rely on professional managers making investment decisions, while passive funds simply track an index such as the FTSE 100. Passive funds generally cost less but will never outperform the market.
It depends on your goals. Income funds pay out dividends for regular income, while accumulation funds reinvest them for growth. Long-term investors often prefer accumulation funds.
Both track indices, but ETFs trade on exchanges like shares, while index funds are priced once a day. ETFs offer greater flexibility and lower dealing costs.
Money market and certain bond funds are considered lower-risk, but no fund is entirely risk-free. Returns can still vary based on interest rates and market movements.
Assess your goals, risk tolerance, and time horizon. A diversified portfolio that includes a mix of fund types often provides the best balance between risk and return.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
