Understanding investing: Your most common questions

At CAF Financial Solutions Limited (CFSL), we often hear from people  who want to understand more about investing, both in general and about our IFSL CAF ESG Funds. Some of the questions we receive need more detailed explanations, and you can find further information in our Investment Knowledge Centre and free Guide to Investments. 

Other questions, however, are easier to answer. So, we have collected six of the most common questions about investing that come up, to respond to in this article. 

1. What is an investment fund?

An investment fund, which is also referred to as a Collective Investment Scheme, is a legal structure that allows multiple investors to pool their money together, with a pool managed by a professional investment manager. As an investor, you receive units or shares in the fund that represent your share of the pool and the terms of ownership.

These terms cover important information, including:

• How the investment manager will invest the assets in the pool.
• How your investment will be affected by rises and falls in the value of those assets.
• How the income your investment generates will be distributed.
• How you can buy or sell your shares or units.
  

Sometimes, it may be possible to trade units or shares directly between investors in your fund. You can also buy and sell them from the fund itself or on a market, such as the London Stock Exchange. This means you can trade when you need to, instead of having to wait for a fellow fund investor to buy from, or sell to, you.

In the UK, there are regulated and unregulated funds. Regulated funds are subject to the regulatory environment created by the UK Financial Conduct Authority (FCA). They must follow a strict set of rules and permissions designed to support a fair market and protect investors. Unregulated funds are governed by legal terms but are not subject to the full FCA rulebook. 

2. Why are there different types of investment funds?

This answer refers to regulated investment funds or collective investment schemes. When a fund manager decides to create a fund, they consider several factors when choosing a structure for their target market. These can include tax, investment flexibility, regulatory burden, and the ability to market in different jurisdictions.

You may also hear the terms, closed-ended or open-ended fund, alot. A closed-ended fund has a limited number of shares available, so the share price may reflect supply and demand as well as the value of the fund’s assets. For example, if investors believe the value of the fund’s assets will increase significantly or the manager has a strong track record, you may have to pay more for shares than the current value of the assets. 

In contrast, an open-ended fund creates and redeems shares or units based on how much money investors are contributing or withdrawing. This removes the supply and demand element, meaning the price stays closely aligned to the value of the fund’s assets at any given time. 

Deciding which type of fund is right for you may depend on availability, your organisation’s circumstances, and the types of assets you wish to invest in.

3. What are the benefits of investing via a fund?

There are three main advantages of using a fund / collective investment scheme:

• Diversification: This helps manage risk and gives access to a wider variety of opportunities. For example, if you had £1,000, you might only be able to buy a few different shares. If something affects the value of one of those shares, then it could have a significant impact on your overall investment. However, if you pooled your £1,000 with other investors to create a bigger pool, say £1,000,000, you would be able to invest in a broader range of shares. This both reduces the potential impact of changes on any single holding, as well as spreading your exposure across more opportunities.  

• Professional management and expertise: The larger the value of the investment, the more attractive it may be to investment managers. This means that you may have access to a wider choice of managers as well as specialist expertise that may not be available if you approach an investment manager directly.

• Administration: Managing a large investment portfolio is time-consuming and costly. In a fund, you do pay costs, but these are shared with fellow investors. Typically, you will also usually get regular valuations, income distributions (where relevant) and statements. The downside is that with a fund, you may not receive a personalised investment approach as you may need to agree to the fund’s objectives and features, which apply to all investors equally.
  

4. What is the difference between income and accumulation units / shares?

As a part-owner of the fund’s assets, you are also entitled to receive part of the income they generate. If you choose income units that income is collected and paid out to you regularly, usually on quarterly or half-yearly basis.

If you choose an accumulation unit the income is reinvested into the fund instead of being paid out, with the aim of increasing the value of your investment. Only accumulation units benefit from this reinvested income.

5. What are SEDOL and ISIN, and why are they important?

SEDOL and ISIN are codes used to identify investments, and they are very important for trading and administrative purposes. For example, income and accumulation units of the same fund will each have separate codes to distinguish them in the systems that support markets.

The Stock Exchange Daily Official List (SEDOL) is a seven-character identification code assigned to securities traded on the London Stock Exchange and other smaller exchanges in the UK. These codes are used for collective investment schemes, insurance-linked securities, and both domestic and foreign stocks.

An International Securities Identification Number (ISIN) is a 12-digit alphanumeric code that uniquely identifies a specific security. Many investments will have both ISINs and a SEDOL code.

6. How quickly can I access my money is I need it?

This may depend on the type of investment you hold. These details should be found in the legal documentation relating to the investment or the terms of its listing on a stock exchange.

The process of investing or realising money from a fund or listed asset on a stock exchange (or similar) is known as settlement. Settlement terms and dates vary depending on the investment. However, it is important to know, for example, that a sale or purchase today may settle four days later. This means the price or cost is fixed today, but the money is exchanged in four days, to enable the necessary administration to be completed. Advances in technology are reducing settlement times for many types of assets.

7. "I can beat inflation by staying in cash. Why should I invest?"

That may be true at the time this comment was published, but current market consensus suggests that inflation could remain stubbornly higher than expected in 2025, while interest rates are likely to fall at least once more.

Investments in ‘risk assets’, for example, stock-markets, property or other types of assets, may always be viewed over the long term, typically five years or more, due to the potential for fluctuating valuations. The right investments can outperform both cash returns and inflation over the long term. At the same time, shorter timeframes carry greater risk of losses as a result of unforeseen circumstances or market conditions.