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.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebooks
ebookPart of The Independent’s new eBook series The Great Composers
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: Account Manager

    £20000 - £35000 per annum: Recruitment Genius: This full service social media ...

    Recruitment Genius: Data Analyst - Online Marketing

    £24000 - £35000 per annum: Recruitment Genius: We are 'Changemakers in retail'...

    Austen Lloyd: Senior Residential Conveyancer

    Very Competitive: Austen Lloyd: Senior Conveyancer - South West We are see...

    Austen Lloyd: Residential / Commercial Property Solicitor

    Excellent Salary: Austen Lloyd: DORSET MARKET TOWN - SENIOR PROPERTY SOLICITOR...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there