In the last issue of Money Matters we discussed the variety of unit trust funds available and how they are classified. Four types of funds that fall outside that classification grid are funds of funds, index funds, multi-manager funds, and exchange traded funds. They have distinctive characteristics and need to be considered in the light of your personal risk profile.

Funds of funds
A fund of funds ("FoF" for short) is a unit trust that invests in a range of other unit trusts. It can invest in a blend of different unit trusts from different management companies, or in different unit trusts from a single company. By law, FoFs are only required to consist of two underlying unit trusts, but they can consist of several.

FoFs can be useful for gaining exposure to a wide range of funds, and you won't have much trouble finding one to suit your particular risk profile - for example, there are aggressive Funds of Funds, balanced Funds of Funds, and managed flexible Funds of funds.

Index funds
Index funds are designed to match the performance of a particular index. These funds are mandated to track the performance of a benchmark index by buying the shares in that index at their respective weightings.

None of this makes sense without understanding what an index is, so here is a basic definition: An index is a compilation of several stock prices into a single number, which gives investors an idea of the overall performance of a stock market or a particular sector of the market. One example of an index is the JSE Security Exchange's All Share index (Alsi), which reflects the performance of most shares in the market, with the shares of the biggest companies having more influence (bigger weightings) on the index.

An overall index fund exposes the investor to medium risk.

Multi-manager funds
Multi-manager funds are an interesting breed. Multi-management is about the way a fund is managed, rather than the type of assets in which it invests. The Association of Collective Investments (ACI) describes them as follows: "A multi-management unit trust invests in an actively managed blend of tailor-made specialist portfolios of equities and fixed interest instruments, by combining the investment styles of different fund managers into one investment product.

"One fund is managed by numerous asset managers, each of them a specialist in a certain sector of the market, adopting different investment styles, favouring certain markets, trends or stocks. The choice of these external fund managers is a quantitative science, which involves the selection and blending of specialist portfolio managers who have been identified as being the 'best of the best' in their particular investment style or approach."

As with funds of funds, you will have no trouble finding a multi-manager fund that meets your risk profile, as the multi-manager approach creates combinations that provide investors with choices designed to meet various risk profiles.

Exchange Traded Funds (ETFs)
ETFs are similar to index funds in that they track a particular index, but they are traded like shares - they can be bought and sold through a stockbroker, and they trade all day like any other share. They give low-cost exposure to shares on the stock exchange, and because they track an index, by their very nature they offer diversity across companies thereby reducing investment risk.

Our aim in this short series on collective investments has been to give you a basic overview of the types of unit trusts available, so that when you start searching for the right one (or two or three) to invest in, you've got some background knowledge. Generally, you cannot go wrong with having one or more unit trusts as part of your investment portfolio. We recommend visiting the ACI website (www.aci.co.za) for more information, and seeking advice from your financial advisor in making a selection.

Next issue: Year-end - time to consolidate and plan.

Click here for previous issues of Money Matters.