What is A Unit Investment Trust?

Sometimes investing can be a minefield with the variety of options made available to people. Knowing where to put your money and how to manage it can be tricky. Especially if you are inexperienced, or easily influenced.

For many, this is why unit trusts become a worthwhile way to invest and hopefully see a return on the investment that makes the time researching and the amount invested worthwhile.

A unit trust is a form of investment where the portfolio you are investing in is already established. With you and others investing, the dedicated fund manager will take your collective money and invest it in an array of assets. The Aberforth UK Small Companies Fund, for example, is an example of a unit trust where the fund manager puts your money into small UK-quoted companies. Each of the companies chosen in this particular unit trust has a market capitalization of equal or lower value of the largest company in the bottom 10% of the main UK equity market or companies in the Numis Smaller Companies Index. 

Unit investment trusts are open-ended meaning the amount of people who can invest or the amount of money that can be invested in them is not limited. 

How does a unit trust work?

A unit trust works by utilising the skills of a fund manager. They will invest the money that has been pooled together through all investors and put it into assets that align with the trust objectives. Unit Trusts are set up in compliance with trust law whereby a trustee is put in place to safeguard the assets and make sure that the fund manager is working with the interest of the investors at heart. This could mean moving money from company to company trying to deliver the best results for investors.

The fund is made up of units which are purchased by the investor. They have the option to buy as many as they wish and can sell at any time. Each unit will have a cost set at the NAV, calculated each day. This isn't the price paid though as admin charges and other associated costs will also be added in.

With its open-ended structure, the fund grows and contracts as units are bought or sold.

What do unit trusts invest in?

Unit trusts can invest in various assets depending on the objectives of the trust and its policies. In the example we gave above, the Aberforth UK Small Companies Fund invests in UK companies, but other unit trusts may look elsewhere for their investors. This could mean looking at different asset classes, regions, and sectors. By splitting the investment across different classes, regions and sectors, a fund manager can diversify and minimise risk. In the example of Aberforth, while they look at just UK smaller companies with this particular trust, splitting the investment across such a large number of companies allows for similar diversification to other funds that may look to international markets or alternative sectors.

How does a unit trust make you money?

You'll make your money in a unit trust when you sell your units for a higher price than you paid for them. 

The trust will invest money in the places it believes will perform well. Returns can then be paid out as income or growth on a defined payment schedule. In the case of the Aberforth fund we mentioned earlier, income distribution is made every six months. Many unit trusts offer the return on your investment as income or growth. Income being paid regularly in the form of dividends, and growth being where your returns are reinvested where they compound and hopefully deliver you an even more impressive return at the end of your time investing.

How do I buy into a unit trust?

You can do this in multiple ways. You can find a unit trust that matches your objectives and invest directly with them. Alternatively, you could find an agent or broker who will handle all the buying for you. Just be aware that further fees may apply. 

How can you tell if a unit trust is the right one to invest in?

Much depends on you and what your objectives are or whether you have an area you feel you could benefit from investing in. Some may offer diversification that suits your goals but charge high fees. Another may cost less to invest in but perhaps invests in areas you don't feel happy putting your money into.

Another thing you should consider is how the fund is managed. You will see funds listed as either actively managed or passively managed. An actively managed fund is where the fund manager will use their knowledge and expertise to buy and sell assets based on trends, looking for a way to beat the market. 

The passively managed fund is often found to have lower fees and much less hands-on management.  It grows and shrinks based on an index. It is often expected that over the long term, a passively managed fund should perform better than an actively managed one but there is no guarantee of this.

How do you know when to sell your units?

You should sell units in a unit investment trust when the units are worth more than when you bought them, however, it all depends on what is known as a bid-offer spread. This is where how much a buyer is willing to pay for a unit is put up against how much a seller is willing to sell it for. 

For example, if the NAV of a unit trust is £2.50, there may be an offer price to buy of £2.75, and the bid price for selling it may be £2.30.

If you now purchased at £2.75, you need to see the bid price rise otherwise you will lose money if you sell quickly. 

As a result, investing in unit trusts is seen as something with long-term rather than short-term objectives at heart.

How much will it cost to invest in a unit trust?

As shown above, you will have the price to buy and the price to sell shown. Your sell price will always be lower than the purchase price as this allows the fund manager to make money. Costs per unit trust will vary but on top of the price you purchase a unit for, you will also have other fees. These are typically around 2% of your total investment value as an initial charge and then a further amount of anything from 0.1%-1.5% charged as annual management charges. You should enquire with the unit trust you wish to invest in first. This way they will be able to confirm the fees associated with the fund. 

What are the advantages of investing in a unit trust?

Unit trusts provide investors with an easy to navigate way into investing. With the money managed by a dedicated fund manager, you don't need to spend time traversing the complicated nature of investments that some find deterring. Investing in a unit trust can be advantageous because:

• It's managed for you! Perhaps one of the biggest benefits is that everything is done for you.

• You can invest small amounts if you are cautious. You do not need to commit to huge sums and can make regular investments of just £25 if you prefer. Lump sums can even be just a few hundred pounds.

• You get to diversify. Your investment is spread across many assets allowing you to avoid the disruption market volatility can cause.

• It's secure. Money invested in a unit trust is held by a nominated trustee. Therefore, if the fund were to go under, your money is still protected.