WHAT IS A UNIT TRUST?
Essential information for beginners

What are Unit Trusts?

Unit Trusts belong to a category of investments known as ‘Pooled Investments’. Pooled investments are funds created by the contributions of many hundreds of investors. The fund is used to invest in the stock market. Pooled Investments often specialise in a particular area such as property or stocks from a particular geographical area. The funds are managed by fund managers. Each investor has to pay a fee on top of their investment to cover the costs of running the fund.

Pooled Investments include:

• Investment trusts
• Unit trusts & OEICS

Pooled Investments offered by Life and Investment Companies include:

• Guaranteed income and high income bonds
• Guaranteed equity bonds
• With-profits bonds
• Unit-linked bonds

Like any other investment, Pooled Investments, such as Unit Trusts, have advantages and disadvantages.

Advantages of Unit Trusts and other Pooled Investments

• You can choose the type of investment you want. For example, you can invest in a Unit Trust that specialises in property, a low-risk Unit Trust that offers guarantees, or one that invests in a particular geographical region, like China.
• You do not have to worry about making investment decisions – the fund manager will make the decisions for you. Unit Trust fund managers are experts in their field and you can be confident that they will make professional decisions on your behalf.  
• Unit Trusts spread your exposure to risk. For example, if you invest in only a few types of shares, you expose yourself to a lot of risk as the collapse of one of your investments could result in the loss of a large percentage of your overall investment fund. In you invest in Pooled Investments such as Unit Trusts, you spread the risk of investing. This is because that with a Pooled Investment, you get a stake in lots of different companies, which spreads the financial risk.
• It can be more cost effective to invest in Pooled Investments rather than investing in individual shares. This is because the costs are spread among all the investors in the fund.
• You can often contribute monthly to a fund – sometimes as little as £50 per month.  

Disadvantages of Unit Trusts and other Pooled Investments

• Fund manager are human beings - even professionals get it wrong from time to time.
• You have to pay charges for someone else to manage your investment.
• Like any other investment in the Stock Market, Pooled Investments or Unit Trusts can rise as well as fall in value.

Other articles:

>>> Stocks, shares and other securities
>>> Investing in bonds
>>> Investing in unit trusts
>>> Cash investments - savings accounts
>>> Premium bonds
>>> Investing in property
>>> Alternative investments

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