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What is a unit trust?

A unit trust is a type of mutual fund where money from many investors (called “unit holders”), is managed by a fund manager to achieve a specific return. This fund manager then creates a portfolio of investments and assets.

With a unit trust, the fund manager invests in bonds or shares of businesses on the stock market. The fund is then split into units, which is what you buy when you invest in a unit fund.

Unit trusts are one of the most popular forms of investment funds. They are generally used by investors who want to buy shares and other assets across a mixed portfolio but have limited time or expertise to manage such investments.

The value of investments or income from a unit trust may go down as well as up, so you could come out with less money than you put in.

How does a unit trust work?

A unit trust investment follows these general steps:

  1. Money you invest is pooled together with other investors’ into one fund.      
  2. The fund manager invests this money in different asset classes – to spread and reduce the risk.
  3. Then the total fund is divided into equal units, which are what investors buy.
  4. You hold this unit(s) and hope to make money as the value of its assets rise in value over time.
  5. Exit the fund by selling your units at the bid price – to profit this needs to be higher than the offer price you initially paid for the unit(s). 

What are the advantages and disadvantages of unit trusts?

 

Advantages of unit trusts

A unit trust can be a popular choice for first-time and experienced investors. The main benefits of investing in unit trusts are:

  • Diversity – Investing in just one unit spreads your money across different investments, with a vast choice of unit trusts available covering most global market sectors. Diversifying investments reduces risk.
  • Accessibility – No fixed term means you can buy and sell into a unit trust when you need to.
  • Regulation – Unit trusts are regulated by the Financial Conduct Authority (FCA).
  • Management – Unit trusts are managed by a professional.

Disadvantages of unit trusts

Before you invest in a unit trust and decide whether it’s right for you, it can be worth considering the risk factors:

  • Risk – Purchasing a unit trust carried a certain level of risk.
  • Costs – Every unit trust charges fees to cover the management costs. You have to pay these even if the fund performs poorly and you lose money. These can include an upfront charge when you buy into a unit trust, alongside annual fees.
  • Limited control – Your investment is entrusted to a fund manager, so performance levels can depend on their level of expertise and experience.
  • Capital risk – Like all investments, there is a chance you could lose some or all of the initial capital invested in a unit trust.

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What is a Unit Trust? | Lloyds Bank

Important legal information

Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065. Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278.

Schroders Personal Wealth is a trading name of Scottish Widows Schroder Personal Wealth Limited.