Unit Trusts

Unit Trusts invest money in the stockmarket on behalf of many private investors who have all pooled their funds so that it can be invested on their behalf by an investment expert - a fund manager.

This money is then invested in a portfolio (or wide range) of companies which will be more varied than the small investor could achieve on his own. The idea is to make your investment grow as quickly as possible. Unit trusts are designed to provide a straightforward, inexpensive and convenient way into the stockmarket.

Unit Trusts are collective investments which give modest and not-so-modest private investors a chance to make capital gains by, usually investing in the stockmarket.

Unit Trusts offer investors the potential to achieve capital gains which exceed what is usually possible in the building society , but in choosing this option entails taking a degree of added risk. Some of the risk may however have been minimised because when you put your money into a unit trust, you are effectively buying a small quantity of shares in several companies. Which ones precisely will be decided by the fund manager.

Investment in a unit trust will involve a minimum lump sum (usually £500 but sometimes £1000 or more) or via monthly savings, a minimum of around £30. Regular savings has the benefit of pound cost averaging .

Private investors invariably pay charges when they buy a unit trust. This can be 5% or more at the outset. There is then an annual management fee, typically 1% to 1.5%. A minority of funds have no initial charges, but slightly higher annual charges.

Unit Trusts are often mentioned alongside Investment Trusts . There are similarities - both pool investors' money and give them the opportunity to select the broad investment strategy - the fund they'd like to invest in.

Unit Trusts (and Investment Trusts for that matter) mostly invest in shares (equities), along with gilts, commercial property and commodities.

See also: Guide to Unit Trusts Moneyextra's Stockmarket Centre .

Last Updated: June 2006 © Moneyextra.com

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