unit investment trust - Unit and investment trusts provide the i

Unit and investment trusts are types of managed investment funds, similar to mutual funds, that pool money from many investors. This collective capital is then invested across a wide range of assets, including stocks, shares, government or corporate bonds, and bank deposits. These trusts offer investors professional fund management and diversification across various securities, companies, and governments.

What are Unit Trusts?

Unit trusts are considered "open-ended" funds. This means the fund will redeem outstanding units from investors immediately upon request. Consequently, the total number of units in a unit trust isn't fixed; it changes as new units are sold and existing ones are redeemed.

The offer price (what you pay) and redemption price (what you receive) for a unit trust are based on the market value of the securities held in its portfolio. These prices are typically set once a day. Units might be traded based on the price determined the previous evening (historic pricing) or the price to be set that evening (forward pricing). Historic pricing can sometimes lead to prices that don't fully reflect current market conditions, while forward pricing means you won't know the exact price until after your order is placed.

The difference between the bid (redemption) and offer (purchase) prices is known as the "spread," usually ranging from 5% to 7%. This spread covers the fund management's initial charge, which includes the costs of the trust's investment transactions and commissions paid to financial intermediaries.

Open-Ended Investment Companies (OEICs)

Open-ended investment companies (OEICs) are another type of investment fund, common in many European countries and introduced in the UK in the late 1990s. OEICs are similar to unit trusts, but a key difference is that OEICs have fully tradable shares whose prices fluctuate constantly with their market value. This feature, along with their familiarity to European investors, suggests that OEICs may gradually become more prevalent than traditional unit trusts for many investment purposes.

What are Investment Trusts?

In contrast to unit trusts, investment trusts are "closed-end" funds. This means they have a fixed number of shares outstanding, and these shares are traded on a stock exchange (like the London Stock Exchange). Investment trusts originated in the 19th century, initially created by wealthy families to manage their assets, and later evolved into companies to allow broader share trading and wider investor participation.

Shares in investment trusts are bought and sold at their market price, plus a commission. They can trade at a premium (above the value of their underlying assets) or at a discount (below the value of their underlying assets). Some investment trusts, known as split-capital trusts, offer different classes of shares. Each class is entitled to a specific aspect of the trust's investments, such as capital growth or income.

What are the Investment Objectives of Trusts?

Both unit and investment trusts are categorized based on their primary investment objectives. Generally, funds aim for either capital growth or current income, but within these broad categories, you'll find a wide array of variations:

• Money Market Unit Trusts: Often seen as an alternative to bank savings accounts, these funds prioritize capital safety by investing in short-term loans to large institutions at money market rates.
• Venture Capital Investment Trusts: These funds seek high returns by investing in promising but speculative, small, and often privately held companies. They involve greater risk than standard growth funds.
• Standard Growth Funds: These invest in larger, more financially secure companies with a history of steadily increasing earnings, aiming for capital appreciation.
• Income Funds: These can range from speculative (investing in high-yield, high-risk securities like "junk bonds") to conservative (investing in low-risk securities with a strong dividend payment history). Their goal is to provide regular income.
• Balanced Funds: Designed to achieve both growth and income, these funds typically invest in a mix of stocks, bonds, and other financial instruments.
• Sector Funds: These funds concentrate their investments in companies within a specific industry (e.g., property) or a particular geographic region (e.g., fast-growing Asian economies).
• Specialty Funds: This broad category includes international stock funds, bond funds, gold and precious metals funds, and ethical funds, among many others.
• Index Funds: Rather than attempting to outperform the market, index funds structure their portfolios to replicate the performance of a major stock market index.

How are These Trusts Distributed?

Unit and investment trusts can be sold through various channels:

• Stockbrokers
• Financial advisors
• Sales staff employed by the fund management company
• Directly by the fund to the investor

Purchasing directly from the fund often involves no commission or a lower one. However, for investment trusts, direct dealings might only occur once a week, meaning you cannot be certain of the exact price at which your order will be executed. Regardless of the distribution method, all funds charge management fees, which are typically a percentage of the fund's value (e.g., 0.5%) and are usually levied against the fund's income.

What are the Benefits of Investing in These Trusts?

As an owner of unit or investment trusts, you receive dividends derived from the dividend income and interest earned on the securities within the fund's portfolio. These dividends are typically paid quarterly or twice a year.

Fund management companies often provide a range of services to their shareholders:

• Regular Investment Schemes: Many funds allow investors to purchase shares at regular intervals and automatically reinvest any dividends earned.
• Fund Families: Many financial institutions offer a "family" of unit and/or investment trusts. This allows you to diversify your savings across funds with different objectives, all managed by the same sponsor, and often switch between these funds with little to no cost.