A five minute guide to investment sectors

Investing can feel like navigating a maze, especially when you’re faced with over 4,000 investment funds in the UK. It’s easy to get lost in the jargon and overwhelm yourself with choices. But don’t worry! This guide is here to break it down for you.

Understanding investment sectors

So, what exactly are investment sectors? Simply put, they’re categories that group similar types of funds based on their investment focus, like the types of assets they buy (stocks, bonds, etc.) or their investment goals (growth vs. income). The Investment Association (IA) organises funds into more than 50 sectors, making it easier for you to find the right investment options.

Why knowing about sectors matters

Understanding investment sectors helps you make smarter choices because it:

• Simplifies your search: Instead of sifting through thousands of funds, you can quickly narrow your options by focusing on specific sectors that align with your goals.
• Allows you to compare funds: It allows you to compare similar funds more easily. If you’re interested in UK stocks, you can check out the funds within that sector and see how they perform against each other.
• Offers insight into trends: Sectors also help you keep an eye on where investors are putting their money, which can give you clues about market trends.

The main types of investment sectors

Now, let’s dive into the main types of investment sectors you’ll encounter:

1. Equities: Growth and Income Options

Equity funds invest in stocks, which means you’re buying a piece of a company. Here are the two main focuses within this sector:

• Income Funds: These aim to provide regular income through dividends. For instance, IA UK Equity Income invests at least 80% of its assets in UK stocks that pay dividends, while IA Global Equity Income does the same for international stocks.
• Growth Funds: These target companies that are expected to grow in value over time. For example, IA UK All Companies includes a variety of companies, while IA North America focuses specifically on US companies.

2. Fixed Income: Bonds for Stability and Income

If you prefer a more stable investment, consider fixed income funds. They invest in bonds, which are essentially loans to governments or corporations. Here are some options:

• Government Bonds: Called gilts in the UK, these are issued by the government and considered low-risk.
• Corporate Bonds: These come from companies and typically offer higher yields.
• Global Bonds: For those looking for a mix, global bond funds invest in bonds from various countries.

3. Mixed Investment: A Balanced Blend

Mixed investment funds combine various asset types, providing a blend of stocks and bonds. This can reduce risk while still offering growth potential. The IA classifies these based on their equity exposure:

• IA Mixed Investment 0-35% Shares: Low equity exposure, ideal for conservative investors.
• IA Mixed Investment 20-60% Shares: A more balanced equity exposure
• IA Mixed Investment 40-85% Shares: Higher equity exposure for those willing to take on more risk for growth.

4. Specialist Funds: For the Niche Investor

Specialist funds focus on specific themes or sectors, such as technology or healthcare. If you’re passionate about a particular industry, these funds allow you to invest in companies within that niche. For example, you might be interested in a fund that targets artificial intelligence or healthcare, for example.

How to Mix and Match Sectors Like a Pro

Creating a well-diversified portfolio involves more than just picking a few random funds. By thoughtfully mixing and matching different sectors, you can tailor your investments to meet your financial goals and risk tolerance. Here’s how to do it effectively:

1. Define your goals

Before you start choosing sectors, it’s essential to clarify what you want to achieve with your investments.

Ask yourself questions like:

• Are you saving for retirement, a house, or your child’s education?
• Do you need regular income, or are you focused on long-term growth?
• How much risk are you comfortable taking?
• Your goals will dictate your investment strategy and the sectors you should consider.

2. Understand your risk tolerance

Risk tolerance varies from person to person. Understanding where you stand on the risk spectrum is crucial. Learn more about risk and reward and how to determine your risk profile in our free Demystifying Investments course.

3. Choose Your Sectors Wisely

Based on your goals and risk tolerance, select the sectors that align with your strategy. And remember to diversity across geographies as well as sectors! Diversification across different regions can reduce risk significantly. Here’s an example: Choosing a IA Global fund alongside domestic options like IA UK All Companies, could help you take advantage of growth in different markets.

4. Rebalance Regularly

Once you’ve created your portfolio, don’t set it and forget it. The market changes, and so will your investment needs. We cover how to review a portfolio and when to sell an investment in our free Demystifying Investments course.

Conclusion

Understanding investment sectors doesn’t have to be daunting. By knowing the main types and how they fit into your investment strategy, you can make smarter choices that align with your goals.

So, whether you’re just starting or looking to refine your approach, remember that sectors are your friends in the investment world. They help you cut through the jargon, make comparisons, and mix and match to create a portfolio that works for you.

Note: this article was originally published 27 July 2023 and updated on 18 October 2024