Unit Trusts

Where from? Unit trust managers or through banks or investment advisers.

How they work Buying units in a unit trust is a relatively cheap way of spreading your money and risk across a range of shares and other investments. Instead of buying shares directly, you buy units in a fund of shares (and possibly other investments) which is run by professional fund managers. The value of your units rises and falls as the values of the underlying investments rise and fall. Your return is usually made up of two parts: income and capital gain (or loss). The income may be distributed to you at regular intervals or it may be automatically reinvested. Different unit trusts specialise in different areas of investment - for example, UK shares, British Government stocks, Japanese shares, smaller companies, and so on.

Minimum investment Varies - for example, £450 for a lump sum, or £45 a month for regular savings.

Maximum investment None.

Tax Income is taxable, even when it's automatically re-invested. Income has tax at the basic rate already deducted. You get a tax credit in a similar manner to income from shares and non-taxpayers can use this to reclaim the tax paid. Basic rate taxpayers have no more tax to pay. Higher rate taxpayers pay extra tax.

Good for People who can afford to take a higher risk in the hope of a higher return, but who don't have enough money to create their own share portfolio. People who want to invest abroad without the extra fuss and administration often involved in direct investment in foreign shares.

Bad for Anyone who might need their money back at short notice perhaps when unit prices are low. Anyone who can't take the risk of losing their capital.

WARNING Check what charges will be made. There are two main ways in which unit trust charges are generally made: the 'bid-offer spread' and an annual management charge.

You buy units at the 'offer price' which is around 6 per cent higher than the 'bid price' at which you could sell the units - make sure you distinguish between the two prices when keeping track of your investment. Annual management charges vary at around 1 to 2 per cent a year of the value of the investments in the trust.

TIP - Under the Financial Services Act, unit trusts can be sold on a cold calling basis - in other words by salespeople on your doorstep ). Be wary of buying in this way - you don't get a chance to look around properly and consider what's on the market. A 14 day 'cooling-off' period is allowed during which you can change your mind and cancel the deal, but you may still end up paying something. This is because the unit trust is allowed to recover from you a loss made if unit prices fall during the cooling-off period.

TIP - There are different pricing systems in use in the unit trust industry and this can make a difference to the price you pay. Under 'historic' pricing, the price you pay has been calculated at the close of the previous day's business. With 'forward' pricing, the price is not calculated until after you've placed your order. And with 'real time' or `frequent valuation' pricing, the unit price is recalculated throughout the day. Assuming other factors aren't more important to you, choose a trust that uses the pricing system which best suits you.


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More On Shares And Investment Trusts

Tax Dividends count as taxable income and are paid with the equivalent of basic rate tax already deducted. You get tax credit as evidence of the tax already paid and non-taxpayers can use this to reclaim the tax. Basic rate taxpayers have no more tax to pay. Higher rate taxpayers pay extra tax.

Good for People who can afford to take a risk in the hope of a higher return - though consider also investment trusts or investments linked to shares as an alternative to direct investment.

Bad for Anyone who may need their money back at short notice perhaps when share prices are low.... see: More On Shares And Investment Trusts


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