The savings schemes grew out of a concern that private investors were missing out on an investment which had been designed for them. Most investment trust shares were held by institutions such as insurance companies, and ordinary people had no way of finding out about them.
Investment trusts are listed companies whose shares are traded on the London Stock Exchange. They invest in the shares of other companies and therefore offer a spread of investment risk not available from individual trading companies.
Investment in shares is one of the best ways of protecting your savings against inflation. Unlike a deposit account, the value of your capital can grow, and the income you receive as dividends is also likely to grow. But unlike deposits, the prices fluctuate.
Private investors nearly always buy when the market is high.Then the price drops and many of the new shareholders sell, sending prices further down.
This is where regular savings come in. If you spread your investment, you buy varying numbers of shares each month. By buying during falls in the market, you will acquire shares at the bottom of the price cycle. When prices recover, the return on your investment will be that much more impressive, because you acquired a large number of shares at the low price.
This is all fine in theory, but it was not always practical to buy small amounts of investment trust shares every month. Stockbrokers' charges ate into a regular saving of pounds 50 or pounds 100. Then in 1984, Foreign & Colonial introduced the first savings scheme and others followed suit.
Because such schemes are run by the company which manages the investment trust, charges tend to be very low. Another advantage of regular savings through these schemes is simplicity: the manager takes care of all the administration.
Most schemes buy shares on a particular day, and your shares will be bought at the price on that day. For some investors this might be a drawback, because you cannot specify when the shares should be bought, or how much you would pay for them. On the other hand, you get the benefit of pound- cost averaging.
There are savings schemes covering nearly 200 investment trusts. You can contribute just pounds 25 a month and you can stop and start your contributions when you like without penalty.
The Association of Investment Trust Companies (AITC) publishes a free information pack which gives details of PEPs and savings schemes from investment trust companies. Telephone 0171-431 5222.
o Fiona Munro works for the Association of Investment Trust Companies.