Unit trusts (UTs) are a form of pooled investment but are quite different from investment trusts (ITs).

They consist of a portfolio of shares managed by a professional company but owned separately by a trust.

The price of a unit is the total value of the underlying investments divided by the number of units. Units may be income (income is paid out) or accumulation (income is reinvested).

Units are bought and sold at varying prices, like shares, any margin between the two being an initial charge which may he as high as 5%. In some cases there is an exit charge instead, which reduces over a period, perhaps to nothing after five years.

There is also an annual charge in the form of a management fee, usually 1-2% of the fund value.

UTs have a similar variety of investing areas to ITs. Of particular interest may be corporate bond funds, especially those targeted at high yield bonds.

It must be remembered that the capital value of corporate bond funds is affected by changes in market interest rates a rise in rates means a fall in value and vice versa. High yield bonds often include foreign company bonds and so are also subject to exchange rate fluctuations.

UTs do not have the facility for gearing and cannot be at a discount or premium to the underlying investments, so tend to be less volatile.

Many PEPs and ISAs are set up by unit trust managers specifically for investing in their range of UTs and there is a lot to be said in favour of pooled investing in equities.

Advisers get an initial commission, so it is worth asking for a rebate, which some offer in their literature - they are called discount brokers. They also get a small annual commission (usually 0.5%). As these commissions cannot be avoided by investing direct it is worth using a discount broker, who may also provide annual or half yearly statements, possibly with useful performance comparisons.

Information about UTs can be obtained from the Association of Unit Trusts.

Open ended investment companies

Unit trusts are a singularly British institution and many are converting to the continental style open ended investment company (OEIC), which have only one price for buying and selling, with separate charges. As they are companies, the 'units' are actually shares.

However, there is a proposal that single pricing should become compulsory for unit trusts.

Fund supermarkets

There are fund 'supermarkets' or 'networks', where the provider offers (usually over the Internet) a number of pooled investments to choose from, with easy (and cheap) transfers between the funds. They are frequently discount supermarkets, with lower initial charges.

Some providers offer a much wider choice than others, so again here it pays to shop around.

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