What is a unit trust?

Unit trusts have long been an important part of the investment landscape, with their existence traced back to the 1930s, when they were launched by M&G.

They are collective investments, where capital is pooled from a variety of different sources into one or several funds on an individual's behalf. A fund manager is generally in charge of ensuring the investment plan moves smoothly and acts on behalf of the investors.

Many countries across the world engage with unit trusts, including New Zealand, Australia, Ireland, South Africa and Singapore.

These days, there are several types of unit trusts for people to consider, depending on what level of risk and reward they want to expose their money to. People are able to keep track on how their unit trust is performing, simply by looking at the latest information published online or in newspapers such as the Financial Times. Interim and annual reports will also be sent out by fund managers so investors are kept up-to-date with how their money is being spent.

A unit trust is also open-ended, meaning it will either grow or contract depending on how much money is added to it or withdrawn. Many unit trust managers within the UK have switched to Open-Ended Investment Companies over the past few years, although recent changes to regulation mean pricing can be achieved in line with unit trusts.

Trustees are actively involved in unit trusts if they so wish and are tasked with the job of ensuring a fund manager is keeping the investment objective in line with what its stakeholders set out to achieve.              

What unit trust options are available to me? 

Each company is likely to offer its own set of unit trusts, each with a different set of investment criteria and reward structure.

Take Legal & General, for example. It has a total of six unit trusts for investors to choose from, including everything from ethical unit trusts to cash products.

The former pitches companies in the FTSE 350 against a number of environmental and ethical policies, only dealing with those that meet strict guidelines. It can be invested in either through an existing unit trust, or a stocks and shares ISA.

Another option is a multi-manager unit trust, which invests in several places at once but only through one investment. This is said to be the perfect option for those who want to see their money grow in a balanced fashion through not investing solely in one company. 

Are there any charges?

Unit trusts are generally subject to some initial fees, charged at a rate of five to six per cent. Annual management charges may also apply and range between 0.5 per cent and two per cent, depending on the unit trust. Fund managers will also increase the fee if extra research is needed into the investment, or specialist management skills need to be drawn upon.

Exit charges may be imposed on some unit trusts and investors need to be aware that buying and selling prices may not necessarily be the same. These are established by the fund manager of the unit trust.

Unit trusts have been a mainstay of the UK investment market for many years and still remain popular with investors. Many high-profile firms still offer unit trusts to their customers, suggesting they are a profitable investment vehicle and one which can provide real long-term financial rewards.