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Should you invest in a unit trust?

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Unit trusts offer a simple and low-cost way of investing in the stock market. Find out whether it’s a sensible option for you with our guide.
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You can choose a unit trust that offers exposure to a global selection of companies or pick one that focuses on a particular region, country, industry or company type.

What are unit trusts?

Unit trusts are investment funds that offer you low-cost access to a portfolio of shares that is managed on your behalf by a fund manager.

Find out more about unit trusts and how they work.

Make the most of your tax-free ISA.

The pros and cons of investing in unit trusts

Investing in a unit trust can be a great way to work your savings harder. However, because your money will be invested in the stock market, it is not risk free and stellar performance is not guaranteed. You may even lose money. This means it’s vital you think about the pros and cons of unit trusts before you invest.

Pros

  • You can start investing in unit trusts from as little as £50 a month or with a £250 lump sum

  • Your investment is managed by a professional fund manager

  • It costs less than buying multiple investments yourself

  • Unit trusts offer instant diversification by holding shares in multiple companies and sometimes different asset classes. 

  • Unit trusts are heavily regulated

  • Over time your money is likely to grow faster than it would in a savings account

Cons

  • Performance is not guaranteed, and you may lose money

  • Charges can be expensive and eat into your returns

  • The sheer number of options can be off putting

  • Although you can access your money at any time, it’s usually best to only invest money you won’t need in the short term


What are the risks of investing in a unit trust?

As unit trusts invest in companies listed on the stock market, the key risk is that the value of your investment could drop if share prices fall. Over time you would hope that your investment can recover and grow, but performance is not guaranteed.

This is why it’s important to only invest if you can afford to tie up your money for a minimum of five, but ideally 10 years. 

It’s also important to choose your fund very carefully and consider the type of fund you invest in. Unit trusts vary hugely both in terms of:

  • Where they invest 

  • The level of risk that they take

  • The returns they achieve

A fund that invests its money in a broad spread of FTSE 100 companies, for example, will generate very different returns and carry a different level of risk to one that only invests in Japanese small companies. 

Is a unit trust right for you?

Investing in unit trusts will never be risk-free but by doing your research, ensuring you have a broad spread of investments and not using money you might need for car repairs, it is possible to mitigate some of the risk. 

If you aren’t sure, it may make sense talking to an independent financial adviser. Alternatively it may be worth doing some research yourself with an investment platform. These websites enable you to buy and sell funds and often offer a lot of guidance and some have independent recommendations for novice investors. 

You should, however, consider delaying your investment plans if you can’t afford to tie up your money for a number of years, or you have expensive debts. The interest you pay on your debts will often be greater than the money you make investing.

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