Investing in Unit Trusts
A unit trust is a common form of open-ended, collective investment scheme in the UK. It gathers money from numerous investors, which is then managed by a professional fund manager according to a specific objective. The entire fund is held under a trust structure, with an independent trustee providing oversight to safeguard investors’ interests.
Investors purchase ‘units’ in the trust. The price of these units is determined by the fund’s Net Asset Value (NAV), the total value of all its underlying investments. Unit trusts usually have a ‘bid-offer’ spread, which means there is a buying price (offer) and a selling price (bid). This difference, along with other management fees, is incorporated into the price and covers the costs of managing the fund.
Invest in a wide range of assets
As an open-ended investment, the fund’s size can vary. When investors invest, new units are issued. When they withdraw, units are cancelled and removed from the fund. This allows the fund to grow during periods of high demand and shrink when investors redeem their capital. The fund’s valuation is usually calculated daily, which is also when transactions typically occur.
The objectives of a unit trust can vary greatly, from targeting capital growth or generating a steady income to a mix of both. To meet these aims, a fund may invest in a wide range of assets, such as equities, bonds, cash, and property (often through Real Estate Investment Trusts, or REITs).
When you invest, you can often choose between:
- Income units: Any income generated by the fund's assets (like dividends or bond interest) is paid out to you as cash.
- Accumulation units: The income is automatically reinvested back into the fund to buy more units, helping your investment to compound over time.
The primary benefits of unit trusts include professional management, instant diversification, and the economies of scale that come from being part of a large, pooled fund. However, there are also risks. The value of your investment is subject to market fluctuations, and charges will reduce your overall returns. In stressed market conditions, liquidity can become an issue, and active funds may not perform as well as their benchmark index (known as tracking error).
THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.
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