PERSONAL INVESTMENT GUIDE

Unit trusts

A unit trust is a portfolio of investments that spread market risks. It allows an investor to reduce their risk exposure by pooling their investment.

When investing in a unit trust, cash buys units. Each unit trust has thousands of people holding units in the fund. A unit trust is an open-ended investment, as the number of units in each trust will vary depending on supply. As more investors join, more units are created.

Unit trusts cover a variety of funds. The funds are grouped together in sectors, covering general principles of style, area and risk level that the fund has chosen to invest in. These range from investing in a particular geographic area such as Europe or Japan, to more specialised categories such as technology. Funds can also be split into two categories in terms of the way that they are managed – actively managed or passively managed. In an actively managed fund the fund manager is responsible for the selection of the shares within the portfolio. A passive fund is more regulated, with the fund following the performance of a particular index (e.g. the FTSE 100). With all these different unit trusts the value of the units may fall and rise depending upon the performance of the fund. Increases are not guaranteed.

Unit trusts are flexible and have no lock-in period, allowing for withdrawal at any time. However, unit trusts are generally seen as medium to long-term investments that are expected to be held for at least five years.

Unit trusts are viewed as medium risk investments, although the exact risk level will depend on the type and fund selected.

An investment trust

An investment trust is a company in which shares can be bought, and which must be quoted on a Stock Exchange, usually the London. It is a ‘pooled’ investment, with many investors owning shares in the same trust.

The investment trust makes its profits by investing in the shares of other companies rather than by manufacturing a product that it then sells. There are no specific investment restrictions for investment trusts, therefore some investments trusts are heavily invested in unquoted securities or the riskier emerging markets.

An investment trust has a fixed issued share capital, which means that the number of shares allowed in an investment trust is fixed - it is a close-ended fund.

The value of the shares in an investment trust is determined by stock market conditions, and the value may fall or rise and is not guaranteed.

With Profits Bonds

With Profits Bonds are single premium Whole of Life policies offered by many insurance companies and usually require lump sum investments. The amount of life cover is normally only minimal, and most With Profits Bonds are taken for investment growth and not life cover alone.

The investment buys units in the insurer's With Profits fund. This fund invests in a wide range of underlying assets such as shares, fixed interest securities and property. Each year bonuses are added to the sum assured either by an increase in the price of units or by allocation of extra units.

Once declared these bonuses cannot be removed and are seen as one of the attractions of With Profits Bonds. This annual declaration of bonuses is known as 'smoothing', and protects the investor from the ups and downs normally associated with investing in stock markets. In years when the performance has been very good the life company will usually retain some of the monies in “reserves” so that in difficult years some level of bonus can be maintained for policyholders.

There is no fixed term to the investment. However, if the bond is encashed in the early years a penalty may be applied. Bonds that are not encashed early will usually attract a terminal bonus on encashment.

It is possible to take a regular income (monthly, quarterly etc) from With Profits Bonds by encashment of units.

A Guaranteed Income Bond (GIB)

A Guaranteed Income Bond (GIB) is a short-term life assurance contract guaranteeing a fixed income over a fixed term. The original investment is guaranteed to be repaid in full at the end of the term. The term is usually between three and five years, and the investment consists of fixed interest stocks. UK based GIBs are paid net of basic tax, which cannot be reclaimed even by non-taxpayers. Offshore GIBs are paid gross, and deferment of tax is permitted.