Regular Savings: To create a splash, jump in the pool

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The Independent Online
One of the more lucrative ways to save regularly, at least potentially, is to put money in a fund linked to the stock market - a unit trust or investment trust from which you can expect a much better return than any kind of savings account.

All the big-name fund managers operate regular savings plans. Some have a minimum payment as low as pounds 20 a month, but most want you to contribute at least pounds 50. Although there are differences in the way they operate, both types of trust are known as pooled funds.

They work on a simple principle: collect savings from lots of people, pool the money and employ experts to work out the best way to invest it. Most funds invest in shares; depending on which trust you choose, your money could go into anything from blue-chip UK companies to a firm that supplies Coca-Cola to Kazakhstan.

The first thing to remember about this type of saving is the trade-off between risk and return. Putting your money in a fund that invests in emerging markets, particularly the "tiger" economies of Asia, can bring high rewards - but it is more risky than one that invests in UK equities. The value of your investment will fluctuate as company performance and share prices rise and fall, so you need to hold it for the long term, five years or more. With more than 1,600 unit trusts, looking after pounds 109bn, how do you choose the right one for you?

Trusts are divided into four main sectors, each with different categories. For example, under the heading "UK funds" there are six types of trust - balanced, equity income, general, gilt and fixed interest, growth, and smaller companies - each with its own objectives. So the starting point is to look at the category that matches your own investment objectives and then write for information from several different trusts within that group. At the lower end of the risk spectrum are the fixed-interest and balanced trusts, which hold a mixture of fixed-interest investments and shares. A growth fund, on the other hand, caters for investors who want to increase their capital. It pays out little or no income, because it reinvests the money it makes. In this way, when you come to sell your units they should be worth a lot more than you paid for them.

An investment trust is a company in which you buy and sell shares. When you buy shares, the fund manager uses the money to invest in other companies. The criteria for choosing an investment trust is similar to that for unit trusts. However, unlike unit trusts, investment trust shares are not directly linked to performance. As with any shares, supply and demand can have a big influence on the price, as can the general sentiment of the stock market. If the investment trust is performing well, that will be reflected in the popularity of its shares. In simple terms, just buying investment trust shares could help the price, as the supply of shares will have reduced, thereby pushing up the price as long as the demand remains. But that is the difference between the two types of trust. If a unit trust manager performs well, the value of units will rise, so investors get the full benefits of choosing the right trust. Investment trusts can be more of a lottery as market sentiment can be fickle.

Both types of trust offer small investors access to the kind of professional investment management they would not be able to afford individually. But before deciding, consider the fund manager's charges, which will be detailed in the prospectus. They can have a big effect on returns.

You can offset the costs and protect your trusts from the taxman by holding them in a personal equity plan. This is a package that can hold shares or unit trust units worth up to pounds 6,000 free of income and capital gains tax, providing the funds hold at least 50 per cent of their portfolios in UK or EU shares.

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