Unit trusts
Unit trusts allow you to invest in world stock markets and are incredibly popular. Thousands of investors pool their money in a fund and the unit trust’s manager invests that cash in a spread of company shares. The ownership in the fund is divided into units. These rise and fall in value in line with the share price performance of the fund’s underlying assets. Because your money is invested in a broad spread of shares, your risk is reduced.
You can now buy units in trusts that invest in a range of financial instruments including corporate bonds, gilts, other unit trusts or even property, but traditionally they are invested in shares only.
There are over 1,500 unit trusts divided into different types or sectors. Choosing one can be a nightmare. If you are new to the stock market, then it is probably wise to start off investing in large general trusts, such as those in the UK Equity Income sector where at least 80% of the fund is invested in shares of UK companies. Check here for the top-performing trusts. It may be sensible to get expert help, unless you are prepared to research the different sectors yourself (see INVESTMENTS – Unit trust sectors).
You can invest in a unit trust with as little as £25 a month or a £500 lump sum, which means it can be a relatively painless way to get a foothold in the stock market. Typically you will pay an initial set-up charge of 5% to 6% and an annual management charge of between 1% and 1.75%. Check here for our Isa/unit trusts charges calculator. You buy units at the offer price and sell at the lower bid price.
Income from unit trusts is usually paid twice a year, net of 20% tax. Higher rate taxpayers pay 40%. When you sell your units you may be liable to Capital Gains Tax if your gain takes you over your allowance.
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TIP: Consider investing in a unit trust, or other collective investment, through an Isa (see INVESTMENTS – Isas) to avoid paying Income Tax or Capital Gains Tax
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The Association of Unit Trusts and Investment Funds will provide key details on unit trusts, including charges and minimum investment requirements. Write to The Unit Trust Information Service, 65 Kingsway, London, WC2B 6TD or call it’s 24-hour information line on 0208 207 1361. The association also has a website at www.investmentfunds.org.uk
