Making regular investments into a unit trust or investment trust can be a relatively painless way to build up a useful fund. Since investment trust savings schemes were introduced in 1985, some pounds 1.5bn has been invested through them.
They have proved popular because investing pounds 50 a monthis a way for those who have no lump sum to get exposure to managed funds. With historic data showing that the stock market generally outperforms building society returns, such an investment can be useful for building up a nest-egg.
On another level, regular investment into a managed fund can be a good investment strategy. Why? Because drip-feeding your cash into an investment will help iron out any rises and falls in its value, which always happens with any stock market shares. It will also avoid the problem of investing when a fund is at a high level. Effectively, regular saving is a safer way of investing.
The process is called pound cost averaging and it relies on the principle that investment trust shares, and the price of units in a unit trust, can fall as well as rise. For example, someone buying pounds 10 worth of unit trusts a month could afford 20 units if the price was 50p. If the price dropped to 25p in the second month, then the investor would get 40 units. A further price fall to 10p in the third month would give the investor 100 units, and then a price rise to 25p in the fourth month would net another 40 units.
The average price of the units at the end of that four-month period would be 27.5p, but the average cost to the investor would be just 20p per unit. Such swings in price are fairly unlikely, but it neatly demonstrates the advantages of making regular investments.
The fund management industry is keen to encourage regular investment schemes, not least because it means they can attract small investors who may not have otherwise considered equity investment.
Jim Hunter of the Association of Investment Trust Companies (AITC), says savings schemes have a number of other advantages. "They're extremely flexible," he says. "You can invest monthly sums but also lump sums when you wish. You can also increase or decrease regular payments and even stop investing and start again at a later date."
The AITC also points to low minimum contributions, from pounds 25 per month, or pounds 250 for a lump sum to top up a scheme, and low costs, because savings scheme managers can negotiate bulk-buy rates with stockbrokers.
Emma Weiss of the Association of Unit Trusts and Investment Funds (Autif), also points to the investment opportunities offered by regular savings into a unit trust. "It's the easiest way to invest in the stock market, especially if you're new to the equities game," she says. "It's convenient and cost-effective and leaves the investment decisions to the professionals.
"You can even set up a direct debit to invest into a unit trust. By doing so, regular saving can become a painless way of investing. In fact you won't even notice the money leaving your account, but it will, over time, grow into a tidy sum."
If your regular savings plan is invested in a personal equity plan (PEP), you will also benefit from the tax advantages, with all profits and income free of income tax or capital gains tax liabilities.
Choosing which regular saving scheme to invest in means choosing from the hundreds available. Professional advice may be the answer to finding the right fund for you.
Contact Autif (0171-831 0898) for information about investing in unit trusts and AITC (0171-588 5347) for information about investment trust companies.Reuse content