Unit Trusts Explained

Unit trusts are designed for everyday people earning normal salaries, but what are they and how do they work? We have the answers...
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Introduction to Unit Trusts

Unit trusts have been a popular choice for investors in the UK for many years, and they remain so in 2020.

This guide takes a look at why top experts and investment advisers still recommend them to people looking to invest their hard-earned money.

Click a link to jump ahead or read on for all a complete overview:

Unit trusts: a simple definition

A unit trust is a collective investment vehicle. They are created under a trust deed and funds are managed by a professional fund manager. The fund manager is responsible for investing your money which is pooled with funds from other investors. When you invest your money you purchase units at the offer price and sell at the bid price.

How do they work?

Unit trusts make money by investing in a wide variety of investments. For example, there are funds which invest solely in British, European, US or Asian-Pacific companies. If you want to diversify based on market sector rather than geography, you can also find fund managers who manage portfolios focusing on industries such as technology, ethical companies or emerging markets.

The overall size of the fund will expand and shrink depending on the number of investors buying or selling their units.

Many unit trusts let you choose whether you want to take returns as income or growth. You can buy ‘income units’ that make regular payouts or ‘accumulation units’ which are automatically reinvested into the investment fund.

If you’re interested in understanding how unit trusts could help you diversify your investments, get in touch and speak to one of the independent financial advisers we work with. They have access to all the investment houses in the UK and can help you devise an investment strategy to fit your circumstances, goals and financial needs.

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How do they make money?

Unit trusts make money by investing in assets such as company shares, property, bonds and other investments as well as some cash assets. You can choose to invest in ‘passive’ unit trusts which follow an investment index, or you can opt for funds investing in a particular market sector or region of the world.

A professional fund manager is responsible for deciding how to invest the collective funds and will buy and sell assets based on trends they know to watch out for and global market behaviours.

Unit trust prices

When you invest in unit trusts, you buy units of the trust at the offer price. When you sell units you sell at the lower bid price. The difference between the two prices is called the spread. To make a return on your investment the bid price has to rise above the offer price before you sell back the units.

The unit price gives investors the measure of the overall fund performance; if underlying investments perform well, the unit price will rise. If one or more underlying investments underperform, this will be reflected in a fall in the price of a unit.

How are unit trusts priced?

Generally, unit trust providers will calculate prices of the funds once a day. Unit prices will be decided based on the value of the underlying assets of the fund. As mentioned above, if the assets rise in value, so will the price of the units. Likewise, should the underlying value fall, so will the value of your unit holding.

Are unit trusts a good investment?

Unit trusts can make a great investment vehicle for first-time investors, as well as those with more experience. The way unit trusts are run means that you can gain exposure to assets which you wouldn’t normally get ready access to. Along with the diversity of assets on offer, the way they are managed is also a bonus.

These are five more popular reasons for investing in unit trusts:

  • Your money will be in safe hands
    While every unit trust is managed by a fund manager who makes decisions on your behalf, they can’t access your cash. The structure of unit trusts is designed to prevent other people from being able to steal your money. The majority of fund managers are also regulated by the Financial Conduct Authority.
  • Comparatively low risk investments
    Due to the way unit trusts spread your money across many different investments, if one investment in the unit trust fund fails, you won’t lose all your savings. On the flipside, if one investment performs brilliantly, your entire holding won’t rise to the extent that it might if you had only invested your money in that single stellar-performing company.
    By spreading your money both widely and wisely, over time your money is likely to return well in excess of what you might get if you held your money in a bank account.
  • They are easy to sell
    Unlike many high interest bank accounts, you don’t need to give a long notice period. If you want to access your money you can withdraw all or some of your invested funds within days.
  • It’s easy to track performance
    It’s simple to keep tabs on your unit trust and you can do so by accessing your statement online or through performance tables which will be probably be published on a daily basis. Unit trust fund managers also publish regular updates which you should be able to access through the provider’s website. These updates will outline how your investments are doing and what your money is being invested in.
  • You don’t need huge sums of money
    One of the best things about unit trusts is that you don’t have to be rich to benefit. They are designed for everyday people earning normal salaries. You can invest as little as £100 as a lump sum or make regular monthly contributions, often starting at around £20 per month.

What are the advantages?

As you may already be realising, there are several strong advantages for investing in unit trusts, the main benefits are:

  • The wide choice of funds:
    The choice of unit trust investments is vast, giving you access to global market sectors without having to manage an individual portfolio of stocks and shares.
  • Diversity:
    Diversifying your investments reduces your risk. Even if you only invest in a single unit trust, you’ll automatically be investing your money across a range of different shares. By investing in multiple unit trusts, your money is invested in an even broader spread of shares which reduces the risk to your investments even further.
  • Accessibility:
    Unit trusts have no fixed term and your money remains accessible from the moment you make your investment. This means you are able to sell a unit trust at any time. Although, when investing in a unit trust, you should be expecting to make a commitment to it for the medium to long-term, ideally five years or more.
  • Get a regular income:
    Unit trusts allow you the option of taking any profits as income. If you hold your unit trust inside an ISA wrapper, this income will be paid 100% tax-free. If your unit trust is outside an ISA wrapper, depending on your circumstances, you may be liable to pay tax on the money you receive.
  • No investment limits:
    There are no limits on how much you can invest in a unit trust. You can invest as much or as little as you wish into a single unit trust or a range of different unit trusts (subject to the minimum amount stipulated by providers). Some providers offer the chance to invest as little as £100 for a lump sum investment or £20 as a regular monthly contribution.

What are the disadvantages?

As far as disadvantages go, there are only few drawbacks to consider when deciding whether a unit trust is the right investment for you.

The main ones are…

  • Costs:
    All unit trusts charge various fees due to the cost of administering a pooled investment of this type. Managed and run by professional fund managers, fees come in the form of management fees which you will have to pay, even if the fund performs badly.
    Fees will be taken on an annual basis and sometimes there will be an upfront charge when you buy a unit trust. Investing in poor performing funds with high fees can deplete your capital so it’s particularly important to ensure you’re investing in the right unit trust. You should seek unit trusts with a strong track record of proven performance with an experienced fund manager at the helm.
  • Lack of control:
    When you buy a unit trust you’re entrusting your money to a team of professionals whose decisions will affect the performance of your investment. Some providers may allow investors access to regular updates but the best thing you can do to mitigate the out-of-control aspect of unit trusts is to ensure you’re making an investment decision you’re confident in.
    Research the track record of the investment provider, specific funds and fund manager performance.

Alternatively, seek advice from an investment expert, like those we work with. Independent financial advisers with access to all the unit trusts on the market, they know what makes a good fund manager tick and can cherry pick the top performing unit trusts which best suit your financial goals and appetite for risk.

What are the risks of investing?

You could lose money if markets perform badly because every unit trust invests in companies tied to the stock market. Fund managers are employed to protect the risk of this happening but that’s unlikely to mitigate it entirely. The best fund managers live and breathe market sectors and stock markets with one aim: maximising returns while minimising exposure.

Of course, it helps that every fund manager is motivated to do the best job as their salary and bonus will be directly linked to the investment performance they deliver to investors.

Some unit trust investments will prove riskier than others, and you can influence this exposure by making wise decisions about the kind of sectors you invest in. However, higher risk also offers the potential for higher returns so before you settle for something safe but underwhelming make sure you understand the kinds of assets a fund invests in.

If you’re unsure about deciding alone, talk to an independent financial adviser to find out which unit trust funds might be a good fit for you. An experienced adviser will be able to advise you of your options based on your financial circumstances, investment goals and appetite for risk.

Get in touch for a free, no-obligation chat and we’ll introduce you to one of the investment experts we work with.

Best performing unit trusts in the UK

There are many ‘best performing’ unit trusts you could choose from but which fund is right for you will depend on your appetite for risk and the investment approach you want to take. For example, you may want to ensure your money is being invested in companies doing good in the world and slant your investment decisions towards ethical funds.

With a view over the last 10 years, the Jupiter European fund is one of the best performing funds (at the time of writing) but there are funds which have performed just as well, if not better investing in different sectors.

Taking Jupiter European fund as an example, just because it was one of the best funds to be in over the last 10 years, this doesn’t automatically mean it will continue to deliver the same returns for the next decade.

An example of another strong performing fund would be Troy Trojan Ethical Income. Launched in 2016, in its first three years it performed ahead of the FTSE All-Share index and also outperformed the IA UK Equity Income sector average. But when you invest in a unit trust you should do so with a long-term view, three years is actually the minimum time many experts would advise investing for.

With hundreds of different funds and fund manager expertise at your disposal, to get your money into the right funds, your best bet is to speak to an independent investment expert who monitors the market and understands all the elements that make up a great investment.

They have an understanding of how a fund manager manages a unit trust and can translate their approach to whether their management style would be a good option for you, your goals and your investment approach as a whole.

If you are investing in more than one unit trust they can also assist with devising an investment portfolio to deliver income or growth at a rate designed to match your needs and expectations.

Speak to an expert

All the experts we work with are fully qualified independent financial advisers ready to provide bespoke investment advice. They will be happy to answer any questions you may have and give you help in finding one, or many, unit trusts which are most likely to deliver the returns you hope to see.

If you decide to make an investment, they’ll even let you know if your investments need upgrading in the future.

Should your unit trust investments begin to perform less well due to a change of fund manager or market fluctuations, they’ll be on the case with a new suggestion so you can relax knowing your investments are in the best possible hands.

Call 0808 189 0463 or make an online enquiry for a free, no-obligation chat and we’ll match you with an investment expert.

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