Unit trusts appeal to both individuals and businesses. It is possible to invest alone, with a partner, or even as a company and could prove a perfect investment for a business. In addition to this, it is possible to set up trusts for other people, making them a great way to build up a nest-egg for children or grandchildren.
A unit trust is a form of collective investment constituted under a trust deed. Unit trusts allow you to pool your money with thousands of other people and invest in world stock markets. What this means is that the dealing costs are shared and all the administration and paperwork is done for you, at a tiny fraction of the expense of doing it yourself. Because the investment is into lots of companies the risks are reduced. Therefore, you are able to benefit from stock market performance without being limited to a few companies.
There are around 2,000 unit trusts in the UK, which invest in stock markets all round the world, so there are plenty of options to choose from. A number of these are based within the home country, but there are large numbers investing in the major developed regions of the world, such as the US, Europe and Japan. Increasingly there is also interest in emerging markets, whether in Latin America, the Far East or Eastern Europe. There are funds investing in metals and natural resources, as well as many putting their money into bonds. You can also choose funds that invest in individual emerging markets, such as China, or in the so-called Bric economies (Brazil, Russia, India and China).
The trust is split into units, each of which has a price related to the overall investment. There is a charge, usually about five per cent, between the purchase price per unit and the sale price at any one time.
Unit trusts are open-ended investments, therefore the underlying value of the assets is always represented directly by the overall number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs.
Each fund has a specified investment objective to determine the management aims and limitations. It is possible to invest with as little as £25 a month or a £500 lump sum, which means it can be a lower risk method of getting a foothold in the stock market.
Typically the investor will pay an initial charge of five per cent to six per cent and an annual management charge of between one per cent and 1.75 per cent.
How are unit trusts run?
- The fund manager runs the trust for profit
- The trustees ensure the fund manager keeps to the fund's investment objective and safeguards the trust assets
- The unitholders have the rights to the trust assets
- The distributors allow the unitholders to transact in the fund manager's unit trusts
- The registrars are usually engaged by the fund manager and generally acts as a middleman between the fund manager and various other stakeholders.
Active or passive?
Actively managed funds are the most common and see fund managers using their own judgement to assemble a portfolio of shares for their funds.However, some funds simply aim to replicate a particular index, such as the FTSE all-share index. These are known as passive funds, or trackers. Experts will debate the respective merits of active and passive funds, though it is fair to say that passive funds offer lower charges.
Tip: With this sort of investment the higher the fee the better the trust has to perform to get the same return. For example a two per cent expense ratio fund would have to have a seven per cent return to end up with real five per cent return. But a one per cent expense ratio fund only has to reach six per cent to end up with the same five per cent return. It may be wise to remember that in this instance one per cent is a big number because of the power of compound interest over time.
Unit Trusts are not for you if
- You like to be in control of exactly where your money is invested. This is because, as the consumer, are not directly involved in deciding how the money is invested. As long as the unit trust fund managers invest money in accordance to the prospectus and deed of the unit trust scheme there is little that you, as the unit holder, can do if you disagree with their investment decisions. However, it is also important to remember that unit trust fund managers are professionals with a reservoir of investment knowledge, so they are more likely to make well considered investment decisions.
- You don't want to pay the fees; The services provided by the unit trust fund managers are not free. Fees and charges are payable by the unit holders to the unit trust schemes. You may feel you are better off making investment decisions yourself and in instances such as this may find a different kind of investment is more suitable.
Unit Trusts are for you if
- You would like someone else to make the investment decisions for you; If you're comfortable to leave the decisions in the hands of the professional then investing in a Unit Trust might well be suitable for you.
- You want to put money away on a regular basis; There are many unit trusts to choose from and for many unit trusts it is possible to set up a regular savings programme and have savings drip-fed.
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Author: KYM Editor
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