What Is a Unit Trust?

A unit trust places your money in the hands of an expert fund manager together with other investors. Here is a guide on what you need to know about unit trusts before you invest.

What is a unit trust?

It is an open-ended grouped investment product, meaning that there is no restriction to how many people can invest in it or the amount of money that can be invested. You purchase units with the investment you make in a unit trust.

How does a unit trust work?

It works by placing your money with other investors into a single fund, which is controlled by a fund manager.

The fund manager then makes use of the unit trust fund to invest in asset classes through various securities.

However, not all securities have the same risk levels, so make sure that you are happy with the risk involved with your selected unit trust.

Where do unit trusts invest?

The fund manager will make use of the unit trust fund to invest in various securities within a specific or selection of classes of assets.

Each investment can be categorised further into an investment region, industry types, and asset classes. Some of the different types include:

  • Investment region: for example, global emerging markets, UK, US, and Japan
  • Asset class: for example, equity, allocation, fixed Income and property
  • Industry sector: for example, real estate, energy, utilities and healthcare

By investing in a range of different investment regions, asset classes, and industry sectors, fund managers can expand where your money is held to try and reduce risk.

How does a unit trust make you money?

You earn money by selling your units at a higher price than you originally purchased them for.

What is a unit?

When you invest in a unit trust, you are purchasing units in the trust with other investors. Every unit has an individual price which is called the Net Asset Value (NAV). More units are created to meet your demands, so there is no restriction to how many units are produced in a single unit trust.

The NAV reflects the value of the overall assets of the unit trust, for example, the investments the fund manager has made with the fund.

This is how the NAV is calculated:

  • Unit trust assets are worth £100,000
  • There are 50,000 units already in issue
  • To find out the NAV, you divide the value of the assets by the number of units already in use, so 100,000/50,000 = 2
  • This means that the NAV is £2

The NAV does not represent the price that you will pay for a unit in a unit trust. The price of a unit is affected by administration costs including the initial charge.

When should you sell your units?

The amount at which you buy or sell units will be calculated using a bid-offer spread.

The way a bid-offer spread is calculated varies between fund managers. It represents the difference between how much you sell and buy a unit for.

For example: Offer price (buy) = £2.10 – NAV = £2 – Bid price (sell) = £1.90

If you purchase a unit at the offer price of £2.10, you must wait until the bid price is higher; otherwise, you risk to lose money.

For this reason alone, a unit trust is not a short-term investment; it can take time for the unit’s ‘sell price’ to outperform the original price that you bought them for.

How else can you get a return on your investment?

This will depend on the unit type you invest in and whether your unit trust is making money or not, such as:

  • Income units: Investing in income units means that you receive a pay-out up to several times per year*.
  • Accumulation units: Investing in accumulation units means that any income will be reinvested in addition to your existing units*.

See also: Should You Invest in a Unit Trust?

You may be liable for Capital Gains Tax if you decide to sell your units – you may visit the GOV.UK website for more information.

What are the fees for investing in a unit trust?

There are some charges to look out for when investing in unit trusts, these include:

  • Annual management charge (AMC): This can be between 0.5 – 2%. It pays for the management of the unit trust.
  • Brokerage fees: This varies from broker to broker.
  • Initial charge: This charge can be around 3-5% of your deposit and only applies if you decide to invest without seeking advice. However, this can be avoided by investing through a broker. Initial charges are sometimes replaced with exit fees instead.

How can you invest in a unit trust?

  • Broker: Talk to a broker regarding your unit trust needs to look for a unit trust that matches the level of risk you are prepared to take.
  • Direct from fund management company: You can directly apply with a fund management company, like Hargreaves Lansdown, who will take you through the process of application.
  • Independent financial advisor (IFA): Seek independent advice from an IFA for an unbiased discussion on the kind of unit trust you should invest in.

Investing in a unit trust via a broker can save you money on fees compared to investing directly.


Should You Invest in a Unit Trust?

Unit trusts allow you to invest your money alongside other investors. It offers the chance of making big profits, but are they worth the risk? Here is a guide on how they can work for you as easily as they could work against you.

Pros and cons of investing in unit trusts

You should seek advice before making any decision on any stock market linked investment, but here are some unit trust related pros and cons to think about before taking that step:

Can invest in multiple securities with different risk factorsOffer price needs to exceed bid price before a profit can be made
Managed by a professional fund managerOverwhelming choice of unit trusts
Can invest in multiple securities with various risk factorsCharges can be expensive
Accepts smaller deposits compared to alternative investment productsCharges can be expensive

How do you monitor your unit trust?

You can observe your investment by contacting your financial advisor or fund manager.

Alternatively, you should be able to access the website of your chosen fund management company to check the performance of your investment at any time you want.

The performance information will reveal the value of the buy and sell price of an individual unit in the unit trust. If the selling price is higher than your original buy price, then you are earning a profit.

Can you use your ISA allowance with a unit trust?

Yes, you can invest in a unit trust by using your ISA allowance. This will make your investment tax-free.

This means that your investment amount is limited to your ISA allowance every tax year – currently £20,000.

Invest by communicating with the unit trust fund management company, an independent financial advisor, or a broker.

What are the risks of a unit trust?

As each unit trust invests in several companies tied to the stock market, you could end up losing cash as a result of a downward turn.

Your fund manager will monitor your unit trust’s performance to try and avoid any blips in the stock market, hence keeping your investment as profitable as possible.

Is a unit trust right for you?

To find out if a unit trust is the right type of investment for you, ask for guidance or advice from a financial adviser before making any decisions.

How do you close a unit trust?

You can talk to the fund manager directly and discuss the withdrawal of your investment.

You may have to pay an exit fee before you get your money back, Depending on the fund management company. This fee can cost you as much as 5% of your overall investment.

You will also lose money on your investment if the unit sale price is lower than when you made your investment. Make sure you arrange your withdrawal at a profitable time or risk losing money.