What is a unit trust?

Unit trusts have several positives

Investing may help your capital grow much more quickly than a savings account can. With the Bank of England's base rate at an historic low, the incentive to save is not as strong as it once was.

The word 'investing' can scare some people due to the inherent risks involved. It is true that any money invested is at risk, whether you invest it in a start-up company or opt for share dealing.

The key is to understand them and if you are in any doubt as to the risk or suitability of an investment or product you should seek advice from an independent financial adviser.
In order to do this, you need to explore all of your options when it comes to investing your hard-earned money and weighing up whether the rewards justify the risks.

As a rule of thumb, riskier investments can offer the potential to deliver larger returns, while those with less risk associated with them tend to deliver smaller gains.

A happy medium exists in the form of unit trusts.

Unit trusts are medium to long-term investment vehicles that work as a pooled investment.

They are controlled by a fund manager who purchases shares in various companies and pools them into a single body. Units of this fund are then sold to investors.

These investment vehicles are highly popular with newcomers to online dealing due to the fact that they can invest their funds according to their risk appetite.

Each unit trust will have a specific investment strategy. Some will involve shares from only the UK's biggest companies, while others may focus on emerging markets or small companies.

Unit trusts are what are known as 'open-ended' instruments, meaning the number of units will rise and fall as investors buy and sell them.

In terms of risk, unit trusts appeal due to the fact that there will be a variety of shares in the trust, meaning the risk is spread. You could lose on the shares of one company but gain on the shares of another.

As previously stated, unit trusts are designed to be medium-to-long-term investment vehicles. The longer you stay in the fund, the better your chances of enjoying a profit. At the same time, it also means you could see the value of your investment fall if a company's performance deteriorates.

So what are the benefits of unit trusts? As mentioned earlier, the risk is spread due to the fact that the trust will include a diverse range of shares.

On top of this, you are pooling your money with that of other investors, giving you greater leverage in terms of purchasing power. You can also monitor the performance of your investment very easily.

As the trust is controlled by a fund manager, you can rest safe in the knowledge you are entrusting your money with an expert who will have years of experience under their belt.
You can invest as much or as little as you like and you also have the option of withdrawing your investment at any time, although this may vary between trust providers, so you must enquire about this.

Ensure you read the Prospectus and understand the nature of the investment you plan to make. Be aware that some may use derivatives which carry a high risk to your capital.
In short, unit trusts are a simple and convenient way of investing your money and if you are risk-averse, they represent one of the better options on the table.

As with any form of investing, you must be sure of where your money is going, so speaking to an expert on the matter before you invest is a good idea.