If you want more digits, switch into units

Click to follow
The Independent Online
It Is no surprise that more and more investors are turning to unit trusts for better returns. Bank and building society savings accounts have been offering increasingly poor interest rates, forcing a number of savers to look elsewhere.

Building societies blame the low mortgage rates they have had to offer in recent times for the correspondingly low savings rates. But even when the bank base rate rose at the end of October, the corresponding mortgage rise was not matched by savings rates rises.

Typical was the Nationwide which increased its mortgage rate by 0.25 while raising savings rates by just 0.1 per cent. Others, in fact, did not even bother to raise their savings rates.

This means that, at the moment, you will probably lose out by leaving your cash on deposit. For savings growth, the stock market might be a better place to be. There are risks with this type of investment: buy into the wrong share and you could wipe out your savings. But by spreading your investments you also spread the risk.

The unit trust is, in essence, a means of benefiting from collective investments. Anyone who, five years ago, started investing pounds 50 a month in a UK Growth unit trust will by now have realised pounds 4,030. The same amount of money put into a top-paying building society account would have realised just pounds 3,248.

Unit trusts also have tax advantages. Many unit trusts can be incorporated in a personal equity plan, so that all gains are sheltered from Inland Revenue tax demands.

Before switching your savings, however, it is worth doing a little homework on unit trusts. They can be risky. They can also be expensive, though this yearunit trust managers have been cutting charges in the industry price war.

What unit trusts do offer is choice. There are now about1,700 to choose from and as many as 170 fund management companies. In the past year alone more than 90 funds were launched, and new entrants are appearing on the scene all the time. Choosing the right trust can be difficult. The main question is how much risk you want to take with your cash, and which trusts fit your requirement.

Past performance can be a good guide, but there are no guarantees. Individual investors should also research fund management teams and try to get to know the underlying investment philosophy.

It can be a good strategy to pick a fund management house, and then select one of their unit trusts. Unit trusts are sorted into 24 sectors and grouped within four categories. The main sector is UK funds, which includes seven types of trust; these are growth and income, growth, smaller companies, equity income, equity and bond income, equity and bond, and gilt and fixed interest. The other sectors are international, based in other geographical areas, or miscellaneous.

At the lower end of the risk spectrum for individual savers are the fixed- interest trusts and balanced trusts, which hold a mixture of fixed-interest investments and shares.

For income seekers there is a large number of income-producing trusts, but bear in mind that taking income from a unit trust can reduce the value of capital. A growth fund will be the best bet for those seeking to increase their capital.

There are even investment trust unit trusts. These are unit trusts that invest in the investment trust companies. Lastly there are fund of funds - unit trusts that invest in other unit trusts. To complicate matters, each trust will be able to present sound reasons as to why you should invest in it. You want to take advantage of the projected property boom? Then you should pick a financial and property unit trust. Or, perhaps, you favour a geographical bias - maybe the markets in the Far East? Then you should pick a unit trust in either the Far East including Japan, or Far East excluding Japan sectors.

With such a wide choice, the chances of homing in on the top- performing fund are extremely slim. So, a better strategy might be to go for a fund that seems to be in sympathy with your own investment strategy.

There are two other things you should bear in mind. First, not all unit trusts are permitted entry to a personal equity plan. Qualifying unit 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, you will only be able to invest up to pounds 1,500 in a PEP, rather than pounds 6,000 in a qualifying unit trust.

The second point to consider is the impact of charges. Unit trusts are traditionally quite expensive, with immediate charges of about 5 per cent. In effect, that means you have immediately lost that much of your investment as soon as you put your money into the trust.

The good news is that things are changing. In the increasingly competitive unit trust industry, fund managers have been reducing charges to make their own funds appear more attractive. The trend began with index-tracker funds - which are not actively managed since the stock choices are not the result of the fund managers' skilful work, but a selection based on performance only. Consequently, these funds cost less to run and the charges are lower.

Companies such as Fidelity and Legal & General have been leading the way in recent times, reducing management charges, in some cases to as little as 0.5 per cent, to gain customers.

Comments