Scratching the surface of Unit Trusts and OEICs (Open Ended Investment Companies)

What does ‘investing in a Unit Trust’ mean?

Investing in a Unit Trust simply means pooling your money with that of other investors, into a single ‘fund’, which is managed by a Fund Manager. The Fund Manager invests the overall fund and makes decisions about where and when to invest.

Now a bit about the ‘technical’ stuff

Technically, a Unit Trust is an Open-Ended Grouped Investment Product, the term ‘open-ended’ relating to the fact that there is no limit to how many people can invest – or how much can be invested. The Fund Manager will invest in various ‘Asset Classes’ through a variety of ‘Securities’ E.g. shares, bonds or gilts) – which may sound complex – but in fact, a key benefit of using a Unit Trust is that you don’t have to consider the technical side of things. In a technical sense, there is much more to say about Unit Trusts but our aim here is to keep things as simple as possible – and to direct you towards taking appropriate Independent Advice.

Take care to select a Unit Trust that suits your attitude to risk

Having said that Unit Trust investing takes away your need to have an expert understanding of asset classes (e.g. equity, allocation, fixed income, property), securities (e.g. shares, bonds, gilts), etc., it is true to say that ‘not all securities have the same level of risk’, hence not all Unit Trust offerings do, so you DO have to make sure, up-front, that you are comfortable that the Unit Trust you choose has a risk profile that matches your own.

So how is money made?

Briefly, the idea of Unit Trust investing is that you aim to make money by selling the ‘units’ you buy, at a higher price than you originally paid. This being the case, Unit Trust investments are not designed for the short term i.e. to make money, you will need to wait until the ‘sell price’ outperforms the original price you paid for your units.

Is this type of investment ‘risk-free’?

No! As well as there being fees for investing in a Unit Trust, the eventual (or regular) potential pay-outs you receive will depend upon whether your Unit Trust is making money or not, and other costs and fees also need to be taken into account. For example,

• if you decide to sell your units, you may be liable for Capital Gains Tax.
• Annual Management Charges will apply (amounting to possibly 0.5 – 2%).
• In addition, at the outset, you will have to pay an initial set up charge that may be 3-5% of your deposit, although (because brokers are remunerated via an agreed disclosed fee), this can be avoided if you invest through a broker.
• Instead of initial charges, sometimes there are exit fees.

In short, there are many things to consider

So… seek advice from an Independent Financial Adviser

Securing the assistance of a good IFA could well save you money and he or she will help you clarify your thinking and assist with selecting the best Unit Trust for your circumstances – having regard to your attitude to risk, the various costs involved, how long you wish to tie up your money for – as well as taking into account numerous additional considerations.

Conclusion

Unit Trusts have many advantages and have been a popular choice for investors in the UK for many years and may have used them to successfully increase their wealth. Top experts and investment advisers recommend them to those wishing to gain financial advantage by investing their hard-earned cash – so clearly, they have a proven track record.

But… it may well be safest to take advice rather than try going it alone.

In general, your money will be in safe hands and Unit Trusts are ‘generally’ comparatively low risk investments, (though not exclusively since higher risk fund investments are possible if requested), that are easy and fast to sell. You can have fun monitoring, online, how your investments are performing – and crucially, you don’t need a huge amount of money to get going (you can invest as little as £100 as a lump sum – or, make regular monthly contributions starting at say £20 per month).

Other benefits

• The choice of funds is wide and varied
• Risk is minimised because not all your ‘eggs’ are placed in one basket as a range of funds will be used
• Your money remains accessible
• You can take regular income from your investments (subject to performance, of course)
• You can invest as much or as little as suits you

Published: 30 June 2020