Unit trusts

If you want to put money in the stock market but wisely don’t want to risk individual shares, then unit trusts are the easiest way to do so. They are pooled investment funds, where investors put their money together and a fund manager picks the shares, cash or bonds to invest in. Unit trusts have been around in the UK since 1931, and today there are more than 2,000 funds with nearly £600 million invested.

When you invest in a unit trust, you buy units in the fund – these are basically shares. The price of the units can then be easily tracked – they are in the newspapers. The price will move in line with the performance of the assets of the trust. You can buy unit trusts monthly paying in the same amount each month from as low as £25 a month or in lump sums. There will be a minimum lump sum you can put in such as £500 or £1,000.

Most unit trust funds have a fund manager (usually backed by a team of researchers) who picks the companies to include in the fund based on a range of pre-set criteria, such as whether it is only covering UK companies or has a particular investment style.

What makes unit trusts different from investment trusts is that they are open-ended. This means that units in the fund are created or cancelled depending on customer demand – investment trusts are close-ended which means there is a set number of shares. Oeics (open ended investment companies) are very similar to unit trusts, but they issue shares rather than units and the pricing is different.

You can hold unit trusts in Isas or Sipps (self-invested personal pensions) and then the growth and income will be protected from tax. There is a huge range of trusts, from those investing simply in the constituents of the FTSE 100 index to those concentrating on far-flung markets or single industries such as property.

Exchange Traded Funds (ETFs) may appear similar to unit trusts and Oeics but they simply track an index and are traded like shares.  The most popular ETF in the UK tracks the top 100 company shares quoted on the stock market – the FTSE 100.

What are the costs?

There are two major costs with unit trusts – the initial and the annual charge. The initial charge can be around 5% and the annual around 1.5%. With unit trusts, you need to be aware of the bid-offer spread which is the way the units are priced to reflect the initial charge. You buy units at the offer price and sell at the lower bid price.

The difference between the two prices is known as the bid-offer spread. If you invest through a fund supermarket or an adviser who rebates charges, you won’t have to pay any or most of the initial charge. Some advisers will rebate part of the annual charge as well.

A fund’s charges will depend on a number of things. Simple tracker funds – which simply follow a computer programme to pick their investments so they can track the performance of an index – often have no initial charge and can have an annual charge of as little of 0.3%. But funds which have to pay an expert fund manager will charge far more. Some will have performance-related charges too which means if it does particularly well more of your profits are turned over to reward the manager.

If you buy a fund directly from the investment house offering it – such as Invesco Perpetual, M&G or Jupiter – you will not be offered a discount on the charges.

Which ones should I buy?

You have a huge choice: unit trusts cover all spectrums of investment risk. You can have funds which pick relatively safe, investment grade corporate bonds which are often used by income-seeking investors. At the other end of the risk profile, there are funds investing solely in the shares of companies based in a single emerging market or a particular sector.

The biggest unit trusts in the UK at the moment are the two Invesco Perpetual funds, Income and High Income, with other giants including M&G Recovery and M&G Global Basics – all of these have billions of pounds under management.