Regular Savings with Unit Trusts: A Smart Way to Invest in the Stock Market

Regular savings with unit trusts make it possible for anyone with a regular income to build up capital, even with small amounts of money. James Hopgood and Paul Nuki explain that investing a large lump sum into the stock market can be risky due to timing issues, whereas feeding money slowly into the market reduces this risk. Victoria Nye, a director of the Association of Unit Trust and Investment Funds, believes regular savings plans are an excellent way for private investors to get involved in stock-market investment.

Key Takeaways:

• Regular savings plans with unit trusts allow anyone with a regular income to build up capital, even with small amounts of money (Pounds 25 a month).
• Investing a large lump sum into the stock market can be risky due to timing issues, whereas feeding money slowly into the market reduces this risk.
• Victoria Nye recommends regular savings plans as an excellent way for private investors to get involved in stock-market investment.
• Regular savings plans encourage people to take a long-term view, which allows them to be more adventurous with their investments.
• Most unit-trust companies now offer regular-savings schemes, which work by fixed contributions being made to the fund each month by direct debit.

The service works very simply: you choose the fund you want to invest in, apply to the company that runs it and then make a fixed contribution to the fund each month by direct debit. This allows investors to gradually build up their investment over time. With most companies, you can cash in all or part of your investment at any time without penalty.

• Large funds, run by well-known unit-trust companies, are a good option for those with no experience of the stock market due to their basic level of stability.
• Unit trusts that invest predominantly in large British and European companies have the advantage of being "Pepable" and are also less volatile than smaller companies and emerging-markets funds.
• Charges are an essential consideration when choosing a unit trust, with most savings schemes comparing well with endowments and other life-assurance products in the short to medium term, but over 25 years they can become more expensive.
• To minimize costs, investors should use unit-trust savings schemes with low annual management charges (ranging from 0.5% to 1%).

Statistics:

• Pounds 25: the minimum monthly payment accepted by most unit-trust companies.
• 25: the number of years over which charges for unit-trust savings schemes can become more expensive than other investment options.
• 1.5%: the annual management charges range of some unit-trust savings schemes.
• 0.5%: the lowest annual management charge for unit-trust savings schemes.
• 1%: the highest annual management charge for unit-trust savings schemes.

Sources:

• The Sunday Times, 1994.