An investment fund (also known as a unit trust or open-ended investment company) pools together investors' money in one big pot. It is a way of investing money, alongside other people, so that smaller investors can have access to a larger number of companies or assets, spreading risk and allowing a professional manager to make the tough investment decisions.
The advantage of investing in an investment fund rather than just directly in shares is that most investors don't have vast amounts of money, so if you buy individual shares, you won't be able to buy many. If you invest in a fund, because your money is pooled with that of other investors, your money will be spread over a larger number of shares, which reduces the risk of your investment.
By investing in a fund, you won't have to decide in which stocks to invest. Some funds are known as 'passive' and these will simply mirror a specific stock market or 'index', investing in exactly the same companies.
Other funds are 'active'. Actively-managed funds have a manager at their helm who devotes their time to analysing stocks and selecting those they believe will outperform. They will whittle down the universe of several thousand stocks to invest in perhaps 100. How they go about doing so varies widely from one manager to the next.
Investment funds can invest in various different asset classes e.g. property, equities, fixed interest etc. Equity funds are the most common and they can invest in various different regions e.g. UK, Europe, Asia etc.
An investment fund can be purchased either outside or inside a tax-efficient wrapper, such as an Individual Savings Account (ISA) or a pension.