Unit trusts


Unit trusts are popular investment vehicles. If you want to create a mixed portfolio of stocks, shares, and bonds, but have no experience or expertise, a unit trust is a good starting point.

What are Unit trusts?

A unit trust is a type of investment fund. Some are actively managed whereas others are passively managed. A fund manager takes money invested and uses it to build a portfolio of assets and investments, such as shares and bonds. Each investor buys a ‘unit’ in the fund, hence the name.

Growth unit trusts let you reinvest any returns, so your capital increases.

Income unit trusts pay dividends, giving you a regular income.

What are the benefits of investing in unit trusts?

Investing in one thing is risky, whereas spreading your money across a broader portfolio of investments reduces your risk exposure. Unit trusts offer greater investment diversity and lower risk.

They are managed by experienced professionals, although returns are not guaranteed.

You can access your money at any time, as there is no fixed term when buying or selling.

Unit trusts are regulated by the Financial Conduct Authority (FCA), giving investors peace of mind.

What is the minimum investment required to start investing in a Unit Trust?

The cost of investing in a unit trust is relatively low. You can invest as little as £500 or choose to invest regular small amounts, such as £25 a time.

What are the risks associated with investing in Unit Trusts?

All investment decisions are taken by a fund manager, so how well the unit trust performs is down to their expertise and experience. If they make bad decisions or the fund performs badly for any other reason, you could end up losing your money. The more high-risk the fund, the greater the potential for you to lose your capital if the markets perform badly. On that note, be aware that you will still be charged fees, even if the unit trust performs badly.

Unit trusts can be rather illiquid. Investors may have to wait as long as 3-4 days to receive their money if they decide to sell a unit. In some circumstances, fund managers also have the option to ‘gate’, which means they can halt sales of units, leaving investors unable to access their capital.

What is the difference between mutual/investment funds and unit trusts?

Mutual/investment funds and unit trusts are two common types of investment vehicles that can help achieve diversification and potentially higher returns. The main difference between them lies in their legal structure. A mutual/investment fund is structured as a company with its own legal personality and shareholders, while a unit trust is structured as a trust with beneficiaries and trustees. From an investor’s standpoint, though, the practical differences between mutual/investment funds and unit trusts are relatively minor. Both types of funds pool money from different investors to invest in a diversified portfolio of securities such as stocks, bonds, or real estate. Both also charge an annual management fee and may levy additional charges for buying or selling units in the fund.

What are the fees associated?

Fees range from 0.1% to 1.5% of your unit value.  You may also be charged an initial fee, calculated as a percentage of your investment.

What are the tax implications when investing in Unit Trusts?

Any income received from an investment is classed as Capital Gains, which is subject to Capital Gains Tax (CGT). CGT is charged at 10% or 18% for basic rate taxpayers and 20% or 28% for higher rate taxpayers. The current CGT allowance is £6,000, so any gains made above this amount are subject to  CGT at the applicable rate. If you invest through a tax wrapper such as an ISA or pension, there are no tax implications.

Always speak to a specialist adviser if you need expert advice on whether unit trusts are the right investment for you.