Unit Trusts Explained

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on January 21, 2019

Updated January 21, 2019

man investing online in unit trusts

With interest rates paid on savings remaining low across the UK, investments are an increasingly attractive option for people wanting to see a return for their money. Depending on the level of risk you are willing to take, there are a number of options out there, including unit trusts, which are one of the most popular forms of investment.

What is a unit trust?

A unit trust brings together a number of investors, who combine their money to get a better return on their savings. They are open-ended and managed by a Fund Manager, who invests in share and bonds (also known as securities) on your behalf.

Another popular alternative, and very similar to unit trusts, are open-ended investment companies or OEICs. However, instead of units being bought for investors, investors buy into a fund that is operated as a company.

How to invest in a unit trust

There are three ways to invest in a unit trust:

1. Through a broker: They will find a unit trust that meets your needs including the amount of money you have to invest and the level of risk you’re willing to take.

2. Through a fund management company: They will manage the unit trust and take you through the application process.

3. Through an independent financial advisor: They offer independent advice on available options and can identify trusts you might want to invest in. Generally, they will not invest on your behalf.

Each option will come with a range of fees and charges. Make sure you are aware of these and include them in any investment calculations.

The benefits of investing in a unit trust

There are plenty of advantages when it comes to investing in a unit trust when compared to other investment options including:

  • Allowing you to invest smaller amounts, making them a good option for new investors who want to test the waters
  • Heavy regulation, meaning there are lower risks attached
  • They are managed by a Fund Manager, removing the heavy lifting on your part as you know your money – in theory – is taken care of
  • Your investment is spread across multiple investments, reducing the likelihood you will lose your deposit
  • There’s a wide range of unit trusts available, meaning there is likely something to meet your financial requirements and the level of risk you are willing to take.

While there are lots of pros when it comes to taking out a unit trust, these only apply if you can afford to lose your investment if things don’t go as well as you’d hoped. You also have to be able to cover the cost of any other fees and charges, which can be costly.

Where does a unit trust Fund Manager invest?

Fund managers will invest in stocks and bonds based on agreed criteria that include an asset class, a region (e.g. the UK, US, or global emerging markets), and industry sector (energy, for example, or healthcare). Unit trusts aim to diversify your investment, reducing any risk.

Unit trusts have different levels of risk. If you are thinking of investing, make sure you are comfortable with the level of risk you are taking on and that you can afford any losses.

Unit trust fees

As with all types of investing, there are fees attached to unit trusts including initial charges, brokerage fees, management charges (normally charged annually). A unit trust will normally cost between 3 and 5% of your deposit to set up, while the annual manage charge can be anywhere up to 2% of your investment. Brokerage fees differ between brokers.

You can sometimes avoid initial charges by investing through a broker or looking for unit trusts that have exit fees instead, though there is still a cost attached to this.

How do you make money through a unit trust?

Your investment is broken down into units, each of which has a specific Net Asset Value (NAV). The NVA reflects the total value of the unit trust’s assets; it doesn’t represent how much you will pay for a unit, which will include administration costs and other fees. The more money available in the trust, and based on investor demand, the more units are created. Investors make money when units are sold at a price that is higher than the one it was bought at.

If you sell your units at a profit, you may be liable for capital gains tax. The Fund Manager can provide more information on this. You will not pay capital gains tax if you do not make a profit from selling your units.

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