Despite rocky market conditions now, most experts agree investing in shares offers the best chance of high returns in the long term. But can you stomach the risk of holding shares in just a few companies?
One way to minimise the risk is to opt for a unit trust. This is a collective investment - the trust holds shares in, perhaps, 100 companies. You participate by buying units in the trust which entitles you to share in the dividends and capital growth of the investments.
"You invest in a unit trust to diversify your risk," says Roddy Kohn of independent financial advisers Kohn Cougar in Bristol. "Even if you have pounds 100,000, there are still too many risks in investing in, say, 10 shares," he says. Using the same amount of money to buy units in a trust could spread your risk across 2,000 shares or more.
Another plus is that unit trusts give you less paperwork to deal with than several separate shareholdings. Ongoing documents are usually limited to a periodical valuation and a manager's report.
Unit trusts are only one of many forms of collective investment. They are far more popular than their older counterpart, the investment trust. "This is only because people understand investment trusts less," says Graham Bates, of independent financial advisers Bates Investment Services.
Investment trusts are based on the same principle as unit trusts. But investment trusts are public companies, and you invest in one by buying its shares. Unit trusts are open-ended funds, with the fund growing according to the amount of units sold.
Investment trusts do involve more short-term risk than unit trusts, says Mr Bates. The share price of an investment trust company can vary depending on how the market views its prospects.
There is a vast range of unit trusts to choose from. The financial services industry splits them up into different sectors according to the way they invest and their objectives. The largest sectors are UK Growth and Income and UK Equity Income, according to The Association of Unit Trusts and Investment Funds, the trade body for unit trust managers.
Apart from the trust's performance, there are major differences between the different unit trusts on offer. You may need monthly income from your investment, so you choose a unit trust which offers this. But this need not necessarily be a unit trust labelled this way. You could plump for a growth trust and use your capital gains tax allowance to take the growth as income.
Some sectors may be more risky. UK Growth is probably less of a risk than Global Emerging Markets, for example. But this is not the whole story. Fund managers, whichever sector they invest in, can follow high or low risk strategies.
"With close to 2,000 unit trusts on the market, you've really got to go to an IFA," says Graham Bates. Not all IFAs specialise in savings and investment, so pick the right one.
Mr Kohn recommends the Gartmore European unit trust and HSBC Income unit trust at the moment. For investment in gilts and fixed interest stocks, he would choose managers Barclays Global Investors.
Different fund managers do well with different types of investment, he says. Past performance, of course, is no guarantee of future returns, but it gives you information.
"Don't aim for the one that's top of the league table today," says Mr Bates. "You should aim for consistency." If a unit trust has managed to stay in the top 50 per cent of its sector in the long-term, then it is probably a reasonable bet.
Unit trusts can be bought and held within a personal equity plan (PEP), which maximises tax benefits. From next April, PEPs will be replaced with individual savings accounts (ISAs), which also act as tax-free wrappers for investments such as unit trusts.
Fees and charges vary. Many companies charge an initial fee, anything from 1 per cent to 5.5 per cent. Expect to pay an annual fee as well, of between 0.5 percent and 1.5 percent. It pays to shop around.
Kohn Cougar, 0117 9466384; Bates Investment Services, 0113 2955955; The Unit Trust Information Service (run by AUTIF) 0181-207 1361
n are open-ended collective investments.
n can invest in quoted equities and bonds.
n are available in many different sectors, eg. UK growth, smaller companies.
n some are more risky than others; an IFA can guide you.
n are not short-term investments; stick with it for at least 3-5 years.
n units are bought and sold through IFAs or the trust manager.
n can be held in a tax- free PEP wrapper, subject to restrictions.Reuse content