Like any form of speculation, there are high risks attached to buying and selling shares. Ann McMeehan, communications director of the Association of Unit Trust and Investment Funds (Autif), says: "Unit and investment trusts will give you a stake in a fully diversified portfolio rather than just taking a punt. Even institutional investors recognise the need to invest in these funds, especially when it comes to putting money overseas in emerging markets. If it is good enough for the professional investor, it's good enough for the ordinary saver."
Investors can choose from nearly 1,700 unit trusts ranging from broadly based general funds offering capital growth, income or a combination of both to the very specialised. The past couple of years has also seen a boom in the popularity of tracker funds that mirror the performance of the FTSE 100 or FTSE All Share indices, the two most widely used stock market indicators.
Unit trusts are open-ended funds. This means there are no limits on the number of units that can be issued. Most general funds carry an initial charge of between 3 and 5 per cent and an annual management charge of under 1 per cent, but specialist funds are likely to have higher charges.
Investment trusts, while fewer in number, have been around longer than unit trusts. They differ from unit trusts in a number of ways, the most important of which is that they are quoted on the stock market and are close-ended.
You have to buy them directly from the management or through a stockbroker and being close-ended means they have a set number of shares in issue. The price you pay for them is determined by supply and demand in the stock market. If an investment trust is out of favour, its share price can be well below its net asset value, what each unit of the fund is worth. This is known as a discount.
With a unit trust, for every pound you invest, you get a pounds 1 share in the underlying assets. Investment trusts are currently trading at a near 14 per cent discount. This means that for every pounds 1 you invest, your share of the underlying assets is worth over 116p.
Charges are much lower with investment trusts. The only initial charge is 0.5 per cent stamp duty while annual charges are often less than 0.25 per cent.
"Both types of funds offer diversity, lower risks and investment management expertise," says Michael Ashbridge, investment director of Save & Prosper. "The main difference between them is that with unit trusts you need not fear the price will go to a discount."
Finding the fund that will suit you depends on what your investment aims are and the type of risks you are prepared to take. Yesterday's fashionable investment has often proved to be today's disaster. In the early 1980s, most investment managers thought the wonders of the growth in the Japanese economy would go on forever. They have been proved wrong.
What to look for in a fund:
o Reputation of the management group.
o Investment aim - long-term growth, rising income or combination of both.
o Past performance - not just over the long term, but also annual performance.
o It should be consistently in the top quartile of its sector.
o Performance depends on an individual fund manager who could move. Perhaps you would prefer a fund run by a team.
o Volatility - does its price go up and down more than its rivals?
o Risk - don't invest in emerging markets unless you want long-term growth.
o Charges - don't pay too much.
o Can it be put into a PEP?
If you are still bewildered, ask an independent financial adviser (IFA) for help. Call 0117 971 1177.