Looking for a smoother ride?

Spread your risk by investing in a unit trust.

If you think the FTSE 100 Index has had a bad month, shedding more than 7 per cent of its value since the middle of September, take a look at the falls suffered by some individual stocks. In the same period, shares in internet service provider Freeserve have dropped to £1.70 from around £3, and Cantab Pharmaceuticals' stock price has plummeted to 75 pence from £3.

If you think the FTSE 100 Index has had a bad month, shedding more than 7 per cent of its value since the middle of September, take a look at the falls suffered by some individual stocks. In the same period, shares in internet service provider Freeserve have dropped to £1.70 from around £3, and Cantab Pharmaceuticals' stock price has plummeted to 75 pence from £3.

No stock market investment is immune from phases of general market weakness, but putting your money in a collective investment should give you a much smoother ride.

Unit trusts are one of the most popular forms of collective investment for retail investors. Like investment trusts and open-ended investment companies, you can make regular savings or invest a lump sum. Investors' money is pooled and invested by a fund manager in the shares of, perhaps, 100 companies.

There is a wide range of unit trusts to choose from. The financial services industry splits them up into different sectors according to the way they invest and their objectives. The largest sectors now are UK Growth and Income and UK Equity Income, according to the Association of Unit Trusts and Investment Funds (AUTIF).

There are major differences between unit trusts and which one you choose depends on your objectives. If you need monthly income there are unit trusts which offer this, for example corporate bond funds. You could choose standard bond unit trusts such as the Legal & General Fixed Interest fund, or for a higher yield, a fund such as the M&G High Yield Corporate Bond unit trust which puts some of its money into riskier bonds. But advisers say you need not necessarily invest in a unit trust labelled this way. You could go for a growth trust and use your capital gains tax allowance to take the growth as income.

Some sectors may be more risky than others. UK Growth is probably less of a risk than Global Emerging Markets, for example. But fund managers in any sector can follow high or low-risk strategies.

Past performance is no guarantee of future returns - but it does give you some information. IFAs warn against aiming for a fund which is top of today's league table. If a unit trust has stayed in the top 50 per cent of its sector in the long term, then it is probably a reasonable bet, they say.

Most unit trusts can be bought and held within an Individual Savings Account (ISA), which maximises tax benefits.

Fees and charges vary. Many management companies charge an initial fee of between one and 5.5 per cent. Expect to pay an annual fee as well of between 0.5 per cent and 1.5 per cent. There may be other fees, and it pays to shop around.

Once invested, how often should you review your choice? "Given that you are going to incur some charges when you invest, I don't feel you should be chopping and changing every six months or even every 12 months," says Warren Perry, from Bristol-based IFA White-church Securities.

* Free information sheets are available from AUTIF's Unit Trust Information Service, 020-8207 1361, www.investmentfunds.org.uk. Whitechurch Securities, 0117 9442266

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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