Investment choices - Unit trusts
May 3, 2007Thanks for visiting! If you like what you're reading, you may want to subscribe to my RSS feed.
Whenever I read about the UK stock market and investments in the UK, two names/acronyms always seemed to be in the picture - unit trusts and OEICs. I had absolutely no idea what these are, even after I had done all my reading on investment choices. Today I finally had a minute to find out what these are all about. So here we go…
Unit trusts are essentially a special class of mutual funds. Many investors put together their money and have a fund manager to buy shares for them and thus diversify their risk without a huge financial involvement (Financial Advisers say that you need about £50,000 - £100,000 to put together a fully diversified portfolio on your own…).
The distinguishing feature of unit trusts is that they are open-ended, which means that as demand for a particular trust increases, the fund manager can just issue new shares. Therefore, the price of a unit trust is not determined by the secret pet theory of all economists (i.e. demand and supply) but actually reflects the underlying value of the fund.
Similar to mutual funds, unit trusts have various objectives to suit your needs and risk attitude: growth or income (i.e. high dividends), small companies or large, domestic or foreign investment and any combination of these (and more). And since it’s an actively managed investment you will have to pay some fees to your trust / fund manager.
One further difference to mutual funds is that unit trusts use different prices for bid and offer, i.e. buying and selling. This means that you will usually pay a higher price when buying shares than what you get if you are looking to sell. The difference is kept by the unit trust to finance their business. My first thought was that this should keep the annual charges and management fees down, because the fund managers earn through this spread as well. I’ll have a look to see whether this is indeed the case or not.
More on investment trusts and finally OEICs soon…
