The trouble is, if you don't have a sizeable lump sum to invest, buying shares is difficult. Dealing charges, for example, eat into very small investments.
This is where the regular savings plans offered by most unit and investment trust companies come into their own. These are funds which offer exposure to stock markets without investors having to buy shares directly. They provide an alternative means of buying units for anyone prepared to put away a regular amount each month. Many funds allow you to invest from as little as pounds 25 a month via a standing order or direct debit from your bank account.
These savings schemes are attractive for several reasons. "First of all," says Emma Weiss of the Association of Unit Trusts and Investment Funds (Autif), "a regular savings scheme makes stock market investment accessible to even the smallest investor. And investing by direct debit imposes a useful discipline on savers."
Further, nearly all the regular savings plans allow you to make the occasional lump-sum contribution to your fund when your finances permit.
Over time, small monthly investments will add up to sizeable sums. Autif reckons pounds 50 a month in an average UK equity income unit trust would have amassed around pounds 4,200 over five years to last August.
Investing monthly also means that you do not have to worry about timing. Share prices rise and fall from day to day and even professional investors and fund managers frequently get their timing wrong. But regular savers avoid the worst problems of timing because their investment plans will smooth out the peaks and troughs. When the price of your unit or investment trust falls, you'll get more units or shares for your monthly payment. This can be particularly useful when, as has been happening recently in a number of Far Eastern countries, including South Korea, markets suffer from potentially prolonged financial crises.
In addition, regular savings schemes are very flexible. Most will let you change the amount you invest each month without penalty. And you can usually have any income your investments earn reinvested in the fund. If you invest with a manager that offers several unit or investment trusts, you will probably also be able to switch between funds on preferential terms.
Choosing a regular savings plan is no different to picking any other investment. First, find the fund with a savings scheme that suits you best. Work out how much you can afford to invest each month, remembering that you are likely to be tying up this money for several years or more to gain the best benefits. Then, simply fill in the application form and set up a direct debit.
Charges are important for all investors, regular savers included. Usually, a proportion of each monthly investment goes to the fund provider, which can be as much as 5 per cent with a unit trust.
Over time, investment performance is more important than charges, but avoid paying through the nose if other funds with similar performance records are cheaper. According to the Association of Investment Trust Companies (AITC), most investment trust schemes charge 1 per cent or less.
There are a few unit trust management companies that charge monthly cash fees rather than a percentage of your fund. Regular savers with Virgin's index tracking fund, for instance, pay a pounds 2 monthly administration fee, which equates to 4 per cent of a pounds 50 investment but just 1 per cent of a pounds 200 monthly contribution.
You can also put up to pounds 6,000 worth of unit and investment trusts into a personal equity plan (PEP) in the current tax year. All the income and capital growth earned in a PEP is tax free but, if you don't use up your capital gains tax allowance each year - pounds 6,500 in 1997/98 - your will only be saving on income tax. Also, you need to check for PEP charges, as these are additional to what you pay for your regular savings scheme.
Remember though: when PEPs are replaced in 1999 by individual savings accounts (ISAs) you will only be allowed to transfer pounds 50,000-worth of PEP investments. That is discussed on page 4.
Autif and AITC publish free fact sheets on savings schemes in unit and investment trusts. Call 0181-207 1361 and 0171-431 5222.
`The Independent' has published a free `Guide to Making your Investments Work for You', written by Steve Lodge, personal finance editor on the `Independent on Sunday' and sponsored by Wesleyan Financial Services. Call 0800 137 9749, or fill in the coupon on page 6.Reuse content