When looking for areas to invest in, you may have come across a type of investment called a unit trust, operated by financial service companies. This collective investment scheme may sound like a charity but it is, in fact, actually a great investment opportunity for all kinds of people.
Unit trusts offer relatively few complications for investors, but how do you know if they are the right investment for you? Asking some of the following questions will help you answer that question.
How flexible are you?
Some investors like to trade on the stock exchange as if they were having a cold shower: they just want to get in, reap the benefits and then get back out as swiftly as possible, by buying shares and selling them soon after for quick and easy money. This shouldn’t be the case with unit trusts (nor really should it be with shares), which are more a medium-to-long-term investment.
The other thing is that the price of units tends to be forwarded, which means the price you pay is set at a future time in the day that has not yet taken place. As a result, you don’t know how much the unit will cost at the time that you order the unit(s). You should leave a margin either side of the minimum and maximum you are prepared to spend per unit to cover the price. You can also specify a limit for your fund manager of how much you are willing to pay for a unit.
How ambitious are you?
Being an open-ended collective investment scheme, many people can join the unit trust and fund managers can increase the number of units if it is appropriate. You can buy as many units as are available if you wish to, depending on your resources and availability. If you do not have major sums of money to invest, or do not wish to invest large sums, unit trusts are a viable alternative, providing an affordable way to invest.
The fact that lots of people can join the trust also means that the fund managers have more resources to purchase securities and the option to diversify the investment, helping to hedge against risk and increase the chances of higher returns. There are two components to returns: first, there is the income raised from the underlying investments, such as in the form of dividends or interest, and secondly, the value of the securities held by the fund itself can also increase.
How much do you know about investment?
Though it’s always wise to know as much as possible about an investment before parting with your money, one of the good things about unit trusts is that there will be a fund manager looking after the investment for you. One of the main decisions you will need to make, however, is whether to place your money into an actively managed fund, in which your fund manager would buy shares selectively, or in an indexed fund, in which the fund manager buys a broad range of shares matching a market index, such as the FTSE 100.
You can follow unit trust progress by reading the financial press and, of course, your fund manager’s reports, but you will not have to do any of the buying and selling on the stock exchange. And being a unit trust, you buy units from the fund itself, and sell them back to the fund, rather than trade them on the stock exchange.
How often do you study the stock exchanges?
Studying the stock exchanges frequently is important when you are choosing a unit trust. There is a range of different unit trusts and their objectives, likewise, vary. Some concentrate on investing in shares, others on buying both shares and bonds, some on real estate, etc. Studying the markets and reading the financial press regularly can provide you with an insight into which sectors, indices, etc. are profitable or where you would like your own money to go. You can then choose a unit trust accordingly, or, once you’ve already joined a trust, switch to a different trust within the fund management company if you require.
Unit trusts are a good investment both for newcomers to the investment world and for old financial hands, though if you are in a hurry to make money, you may wish to trade on the stock exchange directly. If you are otherwise flexible in your aims, they are a good investment, likewise if you are not overly rigid with the amount of money you can invest. Even if you cannot invest particularly high sums, unit trusts still provide flexibility.