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.

Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebooks
ebookA delicious collection of 50 meaty main courses
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs General

    Recruitment Genius: Business Development Manager / Sales - OTE £45,000

    £35000 - £45000 per annum: Recruitment Genius: This company is a solutions / s...

    Recruitment Genius: Sales Executive - OTE £45,000

    £18000 - £45000 per annum: Recruitment Genius: A Sales Executive is required t...

    Recruitment Genius: Test Development Engineer

    £35000 - £40000 per annum: Recruitment Genius: Are you inspired to bring new a...

    Recruitment Genius: Trainee Motor Engineer

    £14000 - £18000 per annum: Recruitment Genius: This is an exciting opportunity...

    Day In a Page

    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific