What is a unit trust?

Unit trusts give you a chance to have your money managed by the professionals. They represent a very easy way for smaller investors to pool together in one fund to invest in stocks, bonds, property and other assets.

Think about it; it’s not worth buying a share on the stock market with less than £1,000 of your cash because of the dealing costs. You then need dozens of shares to spread the risk so that one lousy investment doesn’t wreck your entire portfolio. Remember the credit crunch of 2007/08? Too many people had direct investments in banking shares and saw their portfolios hammered.

You’re talking serious money here. Yet for a low £1,000 minimum or £50 a month regular savings, you can invest in a unit trust where your risk is spread across a portfolio of shares that’s been put together by a professional fund manager who can devote far more time to the matter than you can.  

So let’s try and answer a few questions you might have:

Why the name (and don’t worry that they are sometimes now called Oeics; they’re pretty much the same thing)? It’s because each investor has a number of units in the trust (or fund) that reflects how much and when they invested. These units have a price that will rise and fall depending on the performance of the trust.

How much do they cost? You’ll pay a fee when you buy a unit trust (maybe up to 5% of your investment) and an annual management charge of perhaps 1-1.5% for the fund manager’s brain power. For that money, you’ll expect a fund manager who’s used to beating his or her target – the benchmark index – most of the time. If they don’t, you should look elsewhere.

How do I choose the right manager? Short answer – read Citywire; we have lots of stories about the good managers and what they’re up to; we have a unique performance rating system – the Citywire Fund Manager Ratings – which sorts out the wheat from the chaff; and we have Citywire Selection which rounds up around 150 of the best unit trusts (and some other forms of investments) for you.

How do I buy them? Probably the most cost effective way is through a 'funds platform' such as Hargreaves Lansdown or Fidelity FundsNetwork. They have a big choice, easy online trading and can offer get you a discount on the initial fee. You can ring up the fund management companies one by one but it will cost you more and you’ll be buried in paperwork.

What can I invest in? You name it, there’ll be a unit trust for it. There are hundreds of different types of funds that invest in many different investment areas. The most basic ones invest  in different asset classes such as shares , fixed-interest stocks such as government gilts and corporate bonds  and commercial property.

The variety of funds grow by the day; it’s possible to buy specialist funds that invest in specific parts of a market such as shares in technology or energy companies while some funds concentrate on specific geographical areas such as the UK, America, Europe, the Far East or the emerging markets.

Funds investing in the markets of a specific country have become popular in markets such as Brazil, India  or Russia. Alternatively general international or global funds are available where the fund manager uses their expertise to decide which parts of the world to invest.