I often hear the word 'gearing' being mentioned in relation to financial products. What exactly is gearing?
Gearing means borrowing money to invest. If you invest in a fund that is 'geared' then the fund manager has raised additional funds through borrowing to invest. This can either be good or bad news for the investor! If the fund performance is better than the rate of interest charged on the borrowing then gearing improves the investment returns. However, if the fund performs worse than the rate of interest it makes this poor return even worse.
Raising additional investment funds through gearing is quite common for a type of collective investment known as an Investment Trust. Funds that use gearing will disclose this and also tell you the level of gearing used. The higher the amount of gearing, the bigger the potential for returns and losses!
(Information is intended for guidance only and is offered without any legal responsibility. None of the information provided constitutes any form of recommendation and is not intended to be relied upon by you in making any investment decision. You should always obtain independent professional financial advice before making any investment decisions).