Updated 03 December 2020
5min read
Whether you want to invest £100K or £1,000, you might like to pool your money with others rather than go it alone. That’s what a unit trust offers. With this kind of investment, you put your money into a portfolio that’s already established and managed for you. For the hands-off investor, unit trusts are a potentially simple way to invest in assets such as equities, bonds and property, if you are willing to take the associated risks. Here you can find out more about how unit trusts work.
Unit trusts are a form of collective investment set up under a trust deed. Using pooled money, a fund manager will invest in a portfolio of assets on your behalf. A form of unit trust is currently offered in the following countries:
A unit trust is set up under trust law. A fund manager is assigned to invest the money in line with the fund’s objectives, and there’s a trustee in place to safeguard the assets and make sure the fund manager is acting in the best interests of the beneficiaries.
The fund is divided into units, and each investor buys one or more of these units to become a beneficiary. Investors can sell their units if they decide to invest their money elsewhere, and they can usually name a beneficiary who will inherit their units if they die.
The price for each unit depends on the underlying value of the assets (Net Asset Value, or NAV), and this is usually calculated each day. Unlike investment trusts, a unit trust is open-ended. That means the fund will grow and shrink as investors buy and sell units.
The trust makes returns by investing in well-performing assets, usually company shares, bonds, property funds, and other assets. The fund will pay out any quarterly or bi-annual returns as either income or growth, and you can usually decide how you want to receive the money. Remember that returns are not guaranteed, and that you can also lose money.
Income – with this option, the fund will pay you a regular income in the form of dividends.
Growth – you can choose to have any returns reinvested to grow the size of your investment, which can act as a ‘compound accelerator’.
When you buy a unit, you’ll be offered a bid (buy) price and a sell price. The bid price is the amount you can buy shares for and the sell price is the amount you’ll be offered if you want to sell your shares back. The sell price is usually lower than the bid price to help the fund manager make money, and the difference between the two is called the bid-offer spread.
Unit trusts also carry some typical fees. An initial charge is a percentage of the amount you’re investing, and it’s usually about 2%, but these fees are becoming less common. Unit holders also need to pay for the professional work carried out by the fund manager in the form of an annual management charge (ACM). It is a percentage calculated on the value of your units. You can expect this fee to range from 0.1% to 1.5%, with most around the 0.75% mark.
Some unit trusts will state an ongoing charge figure (OCF), which combines a number of fees, like the ACM, registration costs and custody fees.
One of the main decisions you need to make when investing in a unit trust is whether you want it to be actively or passively managed.
A fund manager will aim to beat the market by buying and selling assets based on global trends, which means the fees are usually higher.
The underlying fund will grow and shrink according to an index (often called tracker or index funds), and the fees tend to be lower because it requires less hands-on management
There is no guarantee that an actively managed fund will outperform a passive one, and you will need to factor in the additional costs of management when making a decision. A lot depends on the individual skill (or lack thereof!) of the fund manager. A good active fund could be expected to outperform passive ones in the short term, while over the longer time, passive funds tend on to outperform active ones on average (because there is more variation between the best and worst active funds).
Another key choice is how and where the funds are invested. You can choose unit trusts that invest in particular sectors, assets or regions, or those that take a more diversified approach. Some invest in other collective investments, which are called multi-manager or fund of funds. There are also funds that make specific ethical investments.
The unit trust you choose will affect the income your investment generates. It is worthwhile speaking to an independent financial adviser (IFA) to decide which type of unit trust suits your goals, risk tolerance and circumstances. An IFA will also have insights on the best performing unit trusts and can help you select the one that’s right for your investment strategy. Here are five funds that have come out on top recently.
Fund |
2019 returns |
Franklin UK Mid Cap |
42.3% |
MI Chelverton UK Equity Growth |
40.58% |
ASI UK Impact Employment Opportunities Equity Retail |
40.55% |
ASI UK Mid Cap Equity |
39.61% |
Premier UK Growth |
39.42% |
Once you’ve done your research and you’re fully equipped with the knowledge you need to get started with your investment, you can buy units in a number of ways. You could go through an agent, broker, or IFA, or buy them yourself either directly with the fund management company or through an online fund platform or stockbroker service.
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