What is a Unit Trust?
If you know the answer to this, you probably also know that the Pension plans, ISAs and Investment Bonds that you hold are invested in Unit Trusts.
However, surprisingly there are many people in the UK who do hold Pensions, ISAs and Investment Bonds, but are unaware that they have invested in Unit Trusts through their savings and investment plans.
Types of Unit Trust
There are thousands of Unit Trusts available in the UK that invest in different geographical sectors and asset classes.
We have listed the main asset classes below, in what the financial industry considers to be the investment risk order, however the stock-market fluctuates on a daily basis and current global and economic events affect the different asset classes in differing ways.
Mains asset classes:
- Fixed interest, e.g. banks and building societies
- Gilts, which are loans to the government, they can be indexed with inflation
- Corporate Bonds, these are loans to companies, which are graded dependant on the risk of default from AAA which have the least level of default risk, down to EEE which have the highest level of default risk. The higher the risk the higher the amount of interest will be charged to the borrower. Most Corporate Bond fund managers only lend to companies rated from AAA to CCC, with the majority of the lending to the A and B categories.
- Property, some is invested in actual property i.e. bricks and mortar, some are invested in property shares and some are a hybrid of the two, they can be in properties in the UK or overseas
- Equities, these are invested in direct shares in the stock-market, they can be in UK companies or overseas companies or a combination of the two
An Equity Unit Trust will hold a wide selection of holdings in many different companies, ranging from approximately 30 companies to 200 companies. This means that if you invested £1,000 in a particular Unit Trust, your investment would be split across a wide range of companies within the Unit Trust in the proportions chosen by the fund manager.
There are usually a much lower number of holdings in Fixed Interest, Corporate Bond, Gilt and Property Funds.
The diversification of the holdings held within each Unit Trust is designed to reduce the risk and volatility of the fund.
A Unit Trust is an ideal way of investing amounts of money in a diversified portfolio of holdings whilst minimising dealing charges. Another name for a Unit Trust is a Collective investment.
The asset performance chart above summarises the best and worst performing assets classes over a 10 year period. The best performers are at the top of the chart and the worst are at the bottom. Source: Severn Investment Management 2011
It is clear from the chart that every year there are winners and losers, therefore most people would be well advised to invest in a diversified asset portfolio. There is no strict rule to this as it will depend on your appetite for investment risk, your personal circumstances and your needs and objectives both now and in the future.
If you would like to print a larger version,(one that you can read) just double click on the table and then press print.
Very often a particular Unit Trust will be available for investment in Pensions, ISAs and Investment Bonds, or on a stand-alone basis, therefore it is important not just to have the most suitable portfolio of Unit Trusts, but also to select the most suitable investment vehicle.
Please note that before making any investment decision, you should consult a professional financial adviser. The information provided is not a recommendation, it is purely to give an insight into one of the major investment vehicles in the UK.