We examine how to choose a unit trust to get the best returns on your investment.
Unit trusts are often touted as one of the easiest ways of investing, and finding the best performing unit trust could see your investment outperform even the best savings account.
However, unit trusts do share some of the risk inherent to all investments, so you need to be confident that the unit trust you invest in will perform well.
Before you can compare unit trust performance, you need to understand how they will grow your investment so you can pick a trust that meets your needs:
How do unit trusts pay investors?
When you invest in a unit trust your money is used to buy ‘units’ in the fund and then pooled with other people’s as a grouped investment.
The trust’s manager re-invests the pooled fund to try and grow its value, with any growth in the overall fund shared proportionally amongst the total units. A well performing fund would see your individual units rising in value, enabling you to sell them if you wished for profit – this is known as ‘capital growth’.
Investments in unit trusts also profit from secondary means of growth called ‘distributions’. Distributions are the fund’s profit from share dividends or bond yields, again divided equally among its investors according to their units in the fund.
By comparing the capital growth of funds as well as the average return of unit trusts investments from distributions you can find the best performing unit trusts over a 5 year period, and their rank against other funds.
There is no guarantee a fund that performed well in the past will continue to do so, although it may be an indicator of a well run fund.
So, choosing which fund to invest in is more than just a case of comparing the track records of unit trust fund performance. You’ll also need to consider unit trust prices, minimum investment requirements and risk levels to make sure you choose the best option.
Getting the best unit trust price
Unit trust prices and performance tend to rise hand in hand, so getting the best prices relative to performance can really pay off.
Unit trusts use two prices at all times; known as the offer price (the price of buying units) and bid price (selling units). These prices are based on a unit’s current value proportionate to the overall fund.
Unit trusts set their prices so that the offer price is always higher that the bid price, which means that you need to wait until the bid price rises above the offer price you paid before you can sell for profit.
Although unit trusts should be a medium to long term investment (which should see the bid price climb above the offer price), a larger bid-offer spread could make a particular unit trust expensive to invest in. Similarly, if their value falls then the bid price would have even further to climb before you could make a profit.
Can you afford the minimum investment?
In addition to the unit price itself, you’ll need to decide the investment you can afford and match that to each fund’s investment criteria.
Minimum investments required – whether for the initial deposit, monthly deposits or additional deposits – will change depending on the fund, so you should only compare funds in that bracket.
You can take advantage of lower unit prices by investing a lump sum, while investing a monthly amount spreads your risk: your regular investment buys fewer units when prices are high, but more when prices are low.
The minimum investment could price you out of some unit trusts, so filtering your comparison using this measure could save you a lot of time.
Risk
As with all investments, investing via a unit trust will place your money at risk and there is a chance you could lose some or all of the money you invest.
While a unit trust limits risk to a certain extent by pooling your money with other investors and then spreading it across a range of investments, you should also consider risk on a fund by fund basis.
Fixed interest unit trusts are seen as the most secure type of unit trusts because the bonds they invest in offer a set return and aren’t as dependent upon the stock market. More stable investments also mean they can pass on a more regular return to you – although this is never guaranteed.
On the other hand, while unit trusts that invest in equity (stocks and shares) are generally exposed to greater risk, they also have the potential for bigger profits, with much relying on the decisions made by the fund manager.
Both fixed interest and equity unit trusts can be exposed to different levels of risk, depending on the markets they trade in.
Emerging industries and economically weaker states may offer attractive potential profits but both will put your money at greater risk than more stable markets.
How to compare unit trust performance
To find the right unit trust to invest in you’ll need to weigh up all the factors above, including the amount you want to investment, the level of risk you’re happy with, the fund type and market.
You should also check whether you can invest via an Investment ISA, as this would make your profits tax free and really help to protect and grow your nest egg.
You can then list the best performing unit trusts, based on your own criteria, on our unit trust performance tables to make sure you choose the best performing unit trust that meets your needs.
