Going it alone? It might be smarter to join the club
People dabbling in shares should consider unit and investment trusts
Sunday 18 August 1996
Most will probably be better off buying into a professionally-managed investment fund such as a unit trust or an investment trust rather than a portfolio of shares. These are often available with the tax-free wrapping of a personal equity plan (PEP).
Unit trusts and investment trusts are based on the same principle. By pooling their money in a single fund, small investors can hold a much wider spread of investments than they could afford individually. The manager of the fund, which often runs into tens or even hundreds of millions of pounds, will invest that money, and spread the investment risk, across 50 or more shares.
Investing in a unit or investment trust will not protect you from all the vicissitudes of the stock market. If there is a market-wide collapse in share prices, as happened in the October 1987 crash, you are unlikely to escape unscathed. But at least you have the comfort of knowing that you will not be ruined because of one bad investment.
Another advantage is that a professional fund manager is constantly watching over the portfolio, buying and selling shares in the light of the changing economic environment. Once again, however, a professional manager is no guarantee of good results. Care needs to be taken to select funds run by firms with good reputations.
Unit trusts are the simpler of the two sorts of pooled fund. They are sub-divided into units, whose price changes to reflect the changing price of the shares held by the fund.
Investment trusts are stock market-quoted companies in their own right, and investors can buy and sell their shares as they would those of any other. The main complication with investment trusts is the discount that often exists between the share price and "net asset value", the value of the investments held by the fund. The share price is determined by the demand for the shares in the market, and if it is substantially less than NAV, the trust may be regarded as cheap, and may even attract a takeover bid.
The same fund managers often run unit and investment trusts. The question of which are better is the subject of debate. Over the past 10 years investment trusts have often seemed to have the better performance records, but this is largely because discounts have narrowed.
Unit and investment trusts that invest at least 50 per cent of their money in European Union stock markets are eligible for a full pounds 6,000 investment from a personal equity plan. PEPs have become popular, and the acronym is often used as if it was synonymous with an investment fund. Strictly, the PEP is only the tax shelter. PEP investments escape income and capital gains tax but since most investors do not pay CGT, the main benefit is tax-free income.
Many fund management companies charge no more for "Pepped" unit trusts than they do for the basic fund.
If you do decide to invest directly in shares, be careful to diversify your risks. Many people gained their first experience of investing in shares through government privatisations. This was a highly unusual form of equity investment, since investors were virtually guaranteed a quick profit by underpricing. Privatised firms are typically big companies with secure earnings, and most enjoy the benefits of a near-monopoly and enormous scope for cost-savings. Few conventional private sector companies are so privileged.
- 1 I've been called an abusive and dangerous parent, when all I did was listen to my transgender child
- 2 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 3 Teaching profession headed for crisis as numbers continue to drop and working lives become 'unbearable'
- 4 The most powerful passports in the world
- 5 Chinese student carries disabled friend to school every day for three years
Nepal earthquake: How you can help victims of the Kathmandu disaster
Nepal earthquake in pictures: Photos show devastation caused by 7.8 magnitude earthquake
Royal baby: Live updates as superbug closes ward at St Mary's Hospital in London where Duchess of Cambridge is due to give birth
Teaching profession headed for crisis as numbers continue to drop and working lives become 'unbearable'
General Election 2015: The photo of a tree that proves the Tories have an image problem
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...