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What is a Unit Trust?

A unit trust is a collective or pooled investment. Unit trusts are available in the UK, Isle of Man, Jersey, Ireland, Australia, New Zealand, South Africa and Singapore.

They are open-ended investments with a collective specified investment objective. This helps to set out the aims and limitations of the trust. Unit trusts are generally seen as best for medium- to long-term investment.

Unit trusts were first launched in 1931 in the UK. The very first one was called the "First British Fixed Trust" and held shares from 24 key companies in a fixed portfolio which didn"t change for 20 years.

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How does a Unit Trust work?

A fund manager (see below) will buy shares in a range of different companies, which is then pooled in a fund. Individuals buy "units" in the fund. The fund is "open ended", which means that the number of units can fluctuate as the individuals (investors) buy and sell units.

The fund manager is in charge, but what other roles are there in a Unit trust? There is a list of key roles, here they are:

  • 1. The Fund Manager

The fund manager runs the trust and ensures it is profitable. This is the head position of the trust.

  • 2. The Trustees

The trustees are next in line – they make sure that the fund manager is doing his/her job properly and keeping to the fund"s investment objective. They also look after the trust assets.

  • 3. The Unit holders

The unit holders have rights to the trust assets.

  • 4. The Distributers

The distributers are there to allow the unit holders to carry out transactions in the fund manager"s unit trusts.

  • 5. The registrars

The registrars are there to keep the whole fund running smoothly – they interact between the various different roles and act as middleman.

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What is a Bid–Offer Spread?

A profit is made in the difference between the "buy" price of a unit – also known as the offer price – and the "sell" price of units – or the bid price. This difference is the bid-offer spread, and it will alter according the type of assets held in the fund. For instance, property might carry 5% or more as it is harder to buy and sell.

In many unit trusts, the fund manager is given the right to change the bid-offer spread in order to correspond with current market conditions.

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How do you Buy Unit Trusts?

You can buy through a variety of providers, including a financial advisor, directly from the fund group, a fund supermarket or a discount broker. It is definitely worth looking around to find a good unit trust instead of heading for the first offer that comes your way.

Buying and selling is done through the fund manager. Over time, the value of your units will hopefully increase together with the overall value of the fund – this is, after all, altering as the underlying share prices alter. However, the value of the units could fall if the underlying share prices fall.

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Who can Buy Unit Trusts?

You must be aged at least 18 years of age to invest in a unit trust. There is no limit to the number of unit trusts you are allowed to invest in – you can invest in as many as you wish.

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How much does it Cost?

The fund manager will charge an upfront purchase charge, which can vary between around 3% and 5%. In addition, they will charge an annual management charge – the AMC. This varies, but is usually between 0.5% and 2% of the market value of the whole fund.

You can shop around to find a good offer – if you invest through a fund supermarket or discount broker you might find some cheap options. However, you will be lacking vital financial advice in doing so.

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What are the Advantages of Unit Trusts?

There are quite a few benefits of unit trusts. For one, they are run by a professional investment manager who is there to pick investments on your behalf and will keep an eye on them to decide when is best to sell them.

Whenever you decide to invest, it is important to spread risk – with a unit trust, you may do this by spreading your capital across a range of investments. That way you will reduce the risk to your money if one company performs badly. Pooled investments invest in one or more asset classes so your options are varied.

Thanks to having a fund in manager in charge of buying and selling, investing in a unit trust is low maintenance – in other words you don"t have to devote a vast amount of your time to your investment as it is being taken care of for you.

There is also a wide choice of unit trusts on offer – so you can pick funds which suit your personal needs.

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What are the Disadvantages of Unit Trusts?

The disadvantages of unit trusts are very similar as with any type of investment. With any form of investment, risk is a key factor – risk to your money. Any money you invest is put at risk of loss. In a unit trust, you are placing you capital in the hands of a fund manager and are therefore not in charge of the day-to-day decisions of where your money is invested.

Therefore, it is very important that you fully research a unit trust before placing your money with them. They should be fully regulated, monitored and be able to provide full and clear information with regards to their past performance, fees and charges.

Fees and charges are another aspect which could be put in the "disadvantages" corner as far as unit trusts are concerned. However, you are gaining from the professional expertise of a fund manager – meaning fees are to be expected and a small price to pay for the management of your capital.

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Investment Strategy

A unit trust, being a pooled investment, will carry a specific investment strategy. This allows you to invest your capital according to your risk appetite. For instance, you might prefer a fund which invests in large companies with a long track record. This might give you less risk than if you were to invest in a fund which invests in emerging markets or small companies.

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What are Active and Passive Trusts?

Most funds are active – they are run by a fund manager who uses their expert judgement to run the fund portfolio. However, there are also funds which are known as passive or tracker funds. They are designed to replicate an index (such as the FTSE all-share index). Generally, a passive fund carries less fees but could be higher in risk as it requires much less management than an active fund.

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What is an OEIC and how does it Relate to Unit Trusts?

An OEIC is an Open-Ended Investment Company. They work very similarly to a Unit Trust – indeed, some Unit Trusts have converted into OIECs – and have only been available in the UK since 1997. In general, OIECs (pronounced oiks) have a single buy and sell price though dual pricing is also possible.

If you are uncertain about which type of fund is better for you, speak with an independent financial advisor to determine whether classical unit trust or an OEIC is more suitable for you.


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