When you choose to save – through a workplace savings plan - your contributions will be invested in a fund, with a view to growing your money
An investment fund is made up of investments bought with money from a number of individual investors.
The individual investors choose which type of fund to invest in, based on the types of assets it holds, and the level of risk.
A fund manager oversees the fund and makes the decisions about which assets it should hold, in what quantities and when they should be bought and sold.
There are five main types of investment: cash, bonds, equities, and property. These are called asset classes and it is important to understand which assets the fund you choose invests in.
Here are four main types of investment, which are often called 'asset classes'. Each one works in a different way and carries its own particular rewards and risks. It is important to understand how they work before you make any investment decisions.
Cash funds invest in cash deposits (for example, in a bank account) and earn a rate of interest.
While it's the safest form of investment, it's not suitable for long-term investments as the potential return is low and inflation may erode the real value of your savings over time.
A bond is a loan issued by governments and companies who raise funds by borrowing money from investors. When you purchase a bond, you are essentially lending money to the issuer.
In return for lending it money, the borrower promises to pay a rate of return in addition to the original loan amount when the bond matures.
Bonds are not entirely risk-free and there is a possibility that the government or company could default on its debt, while changes in interest rates may cause the value of a bond to rise or fall.
Equities are shares issued by companies that trade on the stock market. When you buy a share, you essentially buy a piece of the business and become part owner.
As a shareholder, you have the potential to make money in two ways, either through profits that the company allocates to its owners (referred to as dividends) or through capital appreciation if the share price rises.
Neither is guaranteed however, and there is always the risk that the share price will fall below the level at which you invested.
Direct investment in a single company can be risky, as you are reliant on just one company to perform well, so buying equities through an investment fund spreads the risk.
Investing in commercial property is sometimes seen as an alternative to investing in equities and bonds. As well as aiming for capital growth on the value of a property, rental income is also a source of return.
There are risks and at times, the value of your investments in these funds could fall quite sharply.
There are several benefits to investing in funds, rather than choosing individual assets or investments:
More about choosing the right funds for you
Before investing, you should also decide what your attitude to risk is