Personal Finance: Share in the benefits of collective share ownership

One lasting legacy of PEPs will have been to introduce many investors to the advantages of reducing risk by pooling their investments. Simon Read explains

NEW INVESTORS attracted by aggressive advertising from the likes of Virgin Direct and M&G have been rightly buying into unit trusts and investment trusts - but without necessarily understanding why.

The simple reason is that collective investments are less risky than direct investment in shares. This, in itself, makes them more attractive to cautious investors.

Additionally, because the funds are run by professional fund managers, they allow individuals with little cash to get access to the kind of investment expertise which they wouldn't normally be able to afford.

Today, there are three different types of collective investment: unit trusts, investment trusts and open-ended investment companies - more commonly known as Oeics. They all offer the chance to spread the inherent risks involved in the stock market by investing in a sizeable bundle of different companies' shares, rather than just one.

All these collective investments reduce the risk by pooling several investors' cash to create large sums that can then be invested in a range of different shares. Then if one share drops in price it should have a limited effect on the rest of the portfolio, so that the overall value of the fund remains pretty solid.

Unit trusts, investment trusts and Oeics are slightly different types of collective investment, each with its own advantages.

A unit trust is a fund split into equal units which can be bought and sold. The price of a unit fluctuates as it is directly linked to the value of the fund; if the fund is performing well, the unit price will be higher, and vice versa. The more investors there are in a unit trust, the more units can be created.

There are 22 categories of unit trust with around 1,700 funds. "It's the easiest way to invest in the stock market, especially if you're new to the equities game," says Emma Weiss of the Association of Unit Trusts and Investment Funds (Autif). "It's convenient, and cost-effective, and leaves the investment decisions to the professionals, who have the time and expertise to make your money work for you."

An investment trust is a company in which anyone can buy and sell shares. The cash raised from the sale of shares is in effect used to invest in other companies. There are now 335 investment trust companies in the UK grouped in 24 different sectors but growth seekers have their own UK and international sectors.

However, unlike unit trusts, investment trust share prices are not directly linked to the underlying performance of the investment portfolio. As with any equity, supply and demand will have a large influence on the share price as will the overall stock market sentiment; although, if the investment trust is performing well that will obviously be reflected in the popularity of its shares.

"Generally, investment trusts have a far better record of growth than any other collective form of investment over the long term and they have the advantage of low management charges," says Andrew Barker, chairman of the Association of Investment Trust Companies (AITC). "They are also quoted on the stock market, which means you can easily buy and sell their shares."

The Oeic only arrived on the UK investment scene last year and is a cross between its two older cousins. Oeics offer shares like investment trusts but are open-ended like unit trusts. This means that they can alter the number of shares they issue to match demand.

Consequently, their share price is based directly on the value of the fund, rather than bending with market sentiment as can happen with investment trusts.

Oeics are seen as the future of collective investment as they are reckoned to be more flexible and simpler to understand than either of their rival types of collective funds. However, few investment houses have taken up the Oeic challenge to date.

Not all unit trusts, investment trusts and Oeics are allowed to be put into a personal equity plan to get tax advantages. Qualifying trusts must have at least 50 per cent of their funds invested in UK or EU quoted shares, bonds or convertibles. If you pick a non-qualifying trust, which must be invested in a stock market recognised by the Inland Revenue, you'll only be able to invest up to pounds 1,500 in a PEP, rather than the pounds 6,000 in a qualifying fund.

Contact Autif (0171-831 0898) for more information about investing in unit trusts and Oeics and the AITC (0171-431 5222) for information about investment trust companies.

Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThe ZX Spectrum is going back on sale - with all your favourite retro games
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebookPart of The Independent’s new eBook series The Great Composers
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    Recruitment Genius: Senior Digital Marketing Consultant

    £28000 - £45000 per annum: Recruitment Genius: A Senior Digital Marketing Cons...

    Recruitment Genius: Assistant Stores Keeper

    £16640 - £18500 per annum: Recruitment Genius: An Assistant Stores Keeper is r...

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Software Developer - C# / ASP.NET / SQL

    £17000 - £30000 per annum: Recruitment Genius: Developer required to join a bu...

    Day In a Page

    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
    'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

    'Queer saint' who bankrolled artworld giants

    British culture owes a huge debt to Peter Watson, says Michael Prodger
    Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

    Pushkin Prizes brings countries together

    Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
    14 best kids' hoodies

    14 best kids' hoodies

    Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
    Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

    The acceptable face of the Emirates

    Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk