Although there are many funds available, most of them invest in one or more of four investment categories, known as asset classes.
You should think about investing in a variety of asset classes, and a range of investments within each class.
The main asset classes are:
Equities (also known as stocks or shares)
Investing in equities means you have part ownership on a company. Although they can offer good growth potential, their value can rise or drop sharply at any time. Therefore, equities should normally be viewed as a long-term investment.
Bonds
Bonds are essentially loans to a Government or company. These loans are often for a set time period and the bond owner usually receives regular interest payments. Some bonds are riskier than others, for example, bonds issued for a longer time period or by companies which are viewed as risky.
Money Market Instruments (including cash)
Money market instruments include deposits with banks and building societies, as well as Government and large corporations. They also include other investments that can have more risk and return than standard bank deposits. Although these are seen as lower risk options, money market instruments can sometimes fall in value.
Property
Property investing includes direct investments in buildings and land, as well as indirect investments such as shares in property companies. Bear in mind that if you invest in property, you might not be able to sell when you want to or get the price you were hoping for.
Other
There are also investments that don't fit into one of these asset class categories. They include direct and indirect investments in real assets like commodities, for example oil or precious metal, and absolute return strategies. There's a variety of absolute return strategies, but in general they aim to give a positive return, regardless of what's happening in the markets. They tend to use derivatives, so funds that include absolute return strategies may have different risks to other funds.
For more information about asset classes, have a look at How to choose the right investment options for your pension (PDF, 740kb).
Remember, there are no guarantees with investments. The value of an investment can go down as well as up and may be worth less than what was paid in.