Gearing

Investment companies can borrow money to invest. This activity is referred to as gearing. It allows an investment company manager to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments.

Gearing involves borrowing money to purchase an investment such as shares, property or managed funds. It is important to realise that gearing amplifies the effect of any changes in asset values, both positive and negative. Thus investors may experience wealth accumulation or depreciation at a faster rate than would otherwise be possible using only your own funds.

In other words gearing adds to the risks but also the potential rewards.

The freedom of investment companies to gear is one of the important characteristics that differentiates them from other collective investments, such as Unit Trusts and OEIC's.

Some investment companies never borrow at all, perhaps because they invest in a sector where there is sufficient excitement without gearing, such as emerging markets.

Levels of borrowing do vary and some investment companies never borrow at all, so it is important to check with the individual investment company.