Unit trusts

A unit trust can be termed as a collective investment company.

Money invested into the trust is used to buy shares and other investments. Investments in the fund go towards buying units which represent a fraction of the total value of the fund.

Because of the trust nature of the investments the unit manager is obliged to buy back the units from investors at any time although the value of these units will depend on the value of the trust as a whole and therefore the individual units at that time.

In the same way as investment trusts, unit trusts can be chosen that invest in specific areas that may aim to produce, for instance, capital growth, income or both. Some funds specialise in investing in overseas areas where the perceived risk is greater (in some areas of the world) while others specialise in the purchase of only "blue chip" stocks. 

It is important to note that, in the same way as shares, unit trusts operate a bid and offer price system. In simple terms this means that at any given price, you will pay slightly more to purchase (offer price) and you will receive slightly less (bid price) if you wish to sell.

The unit trust manager who is responsible for managing the fund and valuing the assets held will derive his / her profit from the fees charged and profit made from dealing in the units in issue. Control of the trust assets and approval of advertising for the fund is controlled by the trustees who also ensure that the Manager complies with the terms of the trust deed.

Investment into a unit trust can be made either by a lump sum investment or by monthly investment, usually by a standing order or direct debit. Many people select to invest on a regular basis rather than with a lump sum in order to smooth out and sudden movements in the price of the units, which is often reflected by sudden changes in the value of equities. This type of benefit is called "pound cost averaging".

Taxation

The important points for potential investors to be aware of are that income from dividends or capital gains in the fund are treated in the same way as the same type of income from shares. (See current taxation levels for more details of current thresholds).

Unit trusts have become very popular over the years and offer a wide variety of sectors to invest in. With the option of either lump sum investments or monthly contributions this type of investment has come within the reach of even the most modest sums of investment capital.