Funds, ETFs and Index Funds
Funds let you spread your money across many investments at once. These guides explain the main types, how they work and how to read the numbers.
- What Is an Index Fund? A UK GuideWhat index funds and ETFs are, how they track a market like the FTSE 100, how they differ from active funds, what they cost and the risks to understand first. Updated 10 October 2026.
- What Is an ETF? Exchange-Traded FundsWhat an ETF is, how it differs from a normal fund, what it costs, stamp duty and tax rules for UK investors, the risks, and how ETFs fit in an ISA or SIPP. Updated 10 October 2026.
- What Is an Investment Trust? UK GuideHow investment trusts work: shares traded on the stock exchange, discounts and premiums to NAV, gearing, dividends, costs, tax, and how they differ from funds. Updated 10 October 2026.
Why most people invest through funds
A fund pools money from many investors and spreads it across many investments, so one company doing badly has less effect on the whole. Funds come in several structures, including unit trusts, OEICs, investment trusts and exchange-traded funds (ETFs).
Index funds and active funds
Index funds aim to match a market such as the FTSE 100, while actively managed funds employ managers who try to beat it. Index funds usually charge less, but neither type guarantees a return. Start with what an index fund is.
Reading the numbers
Every fund publishes a factsheet showing what it holds, its Ongoing Charges Figure and its past performance. Past performance is not a guide to the future, but charges are certain, so they are one of the most useful numbers to compare.
What is the difference between an ETF and a fund?
An exchange-traded fund (ETF) is listed on a stock exchange, so you buy and sell it during the trading day at the market price, as you would a share. Unit trusts and OEICs aren't listed. You buy and sell units directly with the fund manager, usually at a single price set once a day. Investment trusts are companies listed on the stock exchange with a fixed number of shares. Their share price can sit above or below the value of what they hold, known as trading at a premium or a discount, and they can borrow to invest, which magnifies gains and losses. Our guide to investment trusts explains discounts, gearing and costs. All of these can be held inside an ISA or a pension. Many ETFs and index funds track the same indices, so the choice often comes down to cost and how you prefer to trade. Our guide to ETFs explains how they work, what they cost and how they're taxed.
Accumulation or income units?
Many funds come in two versions. Accumulation units reinvest any dividends or interest back into the fund automatically, so the money keeps compounding without you having to do anything. Income units pay that money out to you as cash. People building wealth over the long term often choose accumulation units, while people living off their investments may prefer income units. Outside an ISA or pension, dividends are taxable in the year they are paid, whichever version you hold.
How do index funds work?
An index fund buys the companies in a market index, such as the FTSE 100, in proportion to their size, so its return should closely match the index, minus charges. Our guide to index funds explains how they're built, what they cost and the risks, including that they fall whenever the market falls.
Explore other topics
- Investing for BeginnersStart investing in the UK with plain-English guides on how investing works, the risks, what it costs and the tax-free accounts you can use.
- ISAs ExplainedHow ISAs work in the UK: the annual allowance, the different types of ISA, the tax rules and how cash ISAs differ from stocks and shares ISAs.
- Investment Platforms and FeesHow UK investment platforms charge: account fees, dealing charges, fund costs and currency fees, and how small percentages add up over decades.
- Pensions and SIPPsHow UK pensions and SIPPs work: tax relief, contribution limits, when you can access your money and how a SIPP differs from a workplace pension.
- Compound interest calculatorSee how regular investing grows over time, and how much difference fees make.