PERSONAL INVESTMENT GUIDE
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.
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 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.
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 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.
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
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.