How do mutual funds work in 2025 in the UK?
Mutual funds are a method of investment in which investors’ money is pooled into a single vehicle that buys a diversified portfolio of securities. In simple terms, a mutual fund will group money from all investors and invest it together to achieve higher returns.
In the UK, most are open-ended funds authorised by the Financial Conduct Authority (FCA) or recognised overseas funds permitted to market to UK investors. Beneath that simple idea sits a tightly regulated operating model: daily or periodic pricing, independent asset custody, strict diversification limits and formal liquidity controls. For financial professionals, understanding these mechanics – plus the UK-specific wrinkles and case studies – helps in due diligence, portfolio construction and client communication.
The structure of UK mutual funds
UK mutual funds are typically set up as authorised unit trusts or as open-ended investment companies (OEICs). Both are open-ended, issuing and cancelling units or shares in response to investor flows, and both must appoint an independent depositary or trustee to safeguard assets and oversee the manager. In UK rules, the depositary is responsible for safekeeping scheme property and for policing instructions from the authorised fund manager, an intentionally arm’s-length check and balance.
In parallel with UK-domiciled products are recognised overseas funds, now governed by the Overseas Funds Regime (OFR). The OFR is the post-Brexit gateway allowing certain non-UK funds – principally EEA UCITs – to be promoted to UK retail clients, replacing the Temporary Marketing Permissions Regime (TMPR), which has been extended to the end of 2026 for transition. Notably, there are over 8,000 funds (including sub-funds) in the TMPR universe, underlining how global the UK fund shelf remains.
Regulation that shapes risk
Most retail-oriented UK mutual funds are UCITS or UCITS-like, bringing prescriptive diversification rules. The most visible is the 5/10/40 rule: no more than 10% in a single issuer, and positions above 5% cannot together exceed 40% of assets. That framework (embedded in UCITS and reflected across guidance) anchors portfolio concentration for daily-dealing funds.
Liquidity, valuation and governance are addressed in the FCA’s COLL sourcebook: managers must value scheme property fairly and price units accordingly, with independent oversight by the depositary. These requirements sit behind operational practices such as swing pricing and dilution adjustments (discussed below) that seek to protect ongoing holders from the costs of large subscriptions and redemptions.
How pricing and dealing actually work
Authorised funds apply forward pricing – orders are executed at the next valuation point, not a stale price. For a concrete UK example, the St. James’s Place Property Unit Trust prospectus states the manager “will deal at a forward price… calculated at the valuation point immediately following receipt of instructions”. That is standard across authorised funds and helps deter time-zone arbitrage.
Many OEICs now operate single swinging pricing: one daily price that can “swing” up or down when net flows are large, passing transaction costs to transacting investors rather than diluting remaining holders. See, for instance, the TM Neuberger Berman UK UCITS prospectus, which describes a single price with a dilution adjustment (“single swinging pricing”).
The St. James’s Place Property Unit Trust prospectus states the manager “will deal at a forward price… calculated at the valuation point immediately following receipt of instructions”.
Types of funds you’ll see in practice
The following are some common fund types found in the UK:
Equity funds
UK equity income, UK smaller companies and global quality strategies are staples. Open-ended equity funds span broad-market and niche mandates and may employ capacity limits to preserve agility. Diversification constraints (UCITS) and forward pricing mean daily dealing remains workable, but managers facing capacity caps often soft-close share classes to protect execution quality. (See UCITS concentration rules cited above.)
Bond funds
From gilt and sterling corporate bond funds to strategic and short-duration credit, fixed-income OEICs provide income and duration management. With rates higher than in the 2010s and spreads cyclically resetting, many UK flows have rotated back into bond funds – something visible in monthly fund statistics published by the Investment Association (IA), which tracks retail and institutional sales by asset class.
Multi-asset funds
Multi-asset OEICs and unit trusts blend equities, bonds and sometimes property or alternatives, offering a single-ticket asset allocation. They are useful in model portfolios, workplace DC defaults and advised propositions, with forward pricing and swing mechanisms helping to manage cash-flow volatility across underlying holdings. (Operational principles per FCA COLL and fund prospectuses cited above.)
ESG and social bond funds
The UK has developed genuinely distinctive strategies here. Columbia Threadneedle’s CT UK Social Bond Fund (launched 2013) pioneered a daily-liquid, outcomes-focused bond approach in partnership with Big Issue Group, and the firm added a UK-domiciled CT Global Social Bond Fund in June 2023 – a rare case study of social-outcome targeting inside a mainstream OEIC. Impact reports quantify holdings and issuer engagement, offering unusually granular primary data for due diligence.
Specialist and illiquid strategies
Beyond mainstream equity/bond, UK investors can now access private markets through LTAFs tailored for DC and wealth channels (e.g., climate-focused infrastructure, private equity). These vehicles are open-ended but priced periodically with notice periods, which is key when setting client expectations on liquidity and sequencing risk.
Market context: scale and flows
For a sense of scale from an original dataset, the ONS time series for “UK mutual funds’ shares” (non-money market fund investment funds) shows assets rising from ~£1.4bn in 1994 to ~£160.7bn in 2022, with £163.6bn in Q1 2023 – a long-run expansion punctuated by risk-asset cycles and 2022’s rate shock. While this series is not the whole authorised fund landscape, it provides a clean, official lens on the growth of mutual fund asset holdings in the national accounts.
Complementing ONS, the Investment Association publishes monthly, category-level funds under management and sales – primary inputs for tracking UK retail sentiment by asset class. As of October 2025, the IA’s latest updates cover data through August/September, reflecting a sustained appetite for fixed income and a cautious stance toward UK-only equities versus global mandates.
Cross-border access remains material: the FCA’s OFR policy and industry guidance confirm the transition of thousands of EEA UCITS from TMPR landing slots into full OFR recognition. For product shelf design, that means the UK retail universe will continue to blend UK-authorised funds with large numbers of recognised overseas funds, albeit with stricter disclosure and governance expectations.
UK mutual funds' shares rose from ~£1.4bn in 1994 to ~£160.7bn in 2022, with £163.6bn in Q1 2023, according to the ONS
What to look for in due diligence
Some common-practice checks when assessing a fund:
Dealing mechanics and liquidity
Check whether the fund uses swing pricing or dilution levies and how notice periods or gating tools might apply in stress. The M&G property and Woodford equity cases show how asset-liability liquidity mismatches or oversight failures can crystallise.
Concentration and capacity
UCITS 5/10/40 and internal capacity controls are central to implementation quality – particularly in small/mid-cap equity or higher-beta credit where trading costs and market depth can spike.
Governance and custody
Verify the named depositary/trustee and their responsibilities; the FCA COLL and HMRC manuals set clear lines between manager, depositary and administrator for good reason.
The bottom line
UK mutual funds work by combining investor capital under a regulated, open-ended structure with independent custody, daily or periodic pricing and guardrails on concentration and liquidity. The rulebook is not theoretical: it explains why funds price at forward NAV, why swing pricing exists, why certain strategies belong in LTAFs rather than daily-dealing OEICs, and how redress can follow when oversight fails. The UK market’s breadth – from social bond pioneers to climate-focused LTAFs – gives professionals rich building blocks and extensive choice.
