Index Trackers

There is a category of unit trusts called index trackers, which are set up to match as far as possible a specific index, such as the FTSE 100, the FTSE all share, the US, Europe or Japan indices.

Perfect linking cannot normally be achieved because no fund can invest in every share in the right proportions. Also indices take no account of the cost of buying and selling, which will depress the value of the tracker compared to the index.

Charges are lower than ordinary unit trusts because expert advisers are not needed. Initial charges are usually no more than 1%.

Some investment trusts offer index loan stocks, which are directly linked to the relevant index and so can achieve perfect linking. They usually have a set repayment date and pay dividends. As they are unsecured, there is a slight risk of a failure to repay, but they take preference over shares in the investment trust.

Index trackers are a relatively cheap and safe way of investing in the stock market.

Exchange traded funds

Recently introduced in the UK, these index trackers (also called extraMARK or iShares) are different from an investment trust in that they are open ended (like an OIEC) and different from a unit trust in that the price varies during the day with the movement of the underlying assets whereas unit trust prices are revised only once a day. There is not a great deal of choice so far, but if they catch on there will be many more. In addition to the FTSE 100 and FTSE ex UK, there are iShares for specific categories, such as TNIT (technology, media and telecom).

Dealing is through a stockbroker. There is no stamp duty to pay and annual charges are low (below 0.5%) They tend to be slightly cheaper than most index trackers.

From experience to date, exchange traded funds seem to track better than traditional index funds, possibly because of the lower charges and reduced internal tax liabilities arising from the way they operate.

Friendly Society Savings Schemes

A friendly society is a mutual insurance and savings organisation operating for the benefit of its members. Usually it has arrangements for sickness and death benefits as well as other forms of insurance and investment.

Friendly societies are authorised to offer a tax free investment linked to their life assurance funds. The maximum investment is £25 a month or £270 a year and schemes run for a minimum of ten years.

There has to be a life assurance element, the cost of which has a slight adverse impact on returns.

Income in the scheme is subject to a favourable rate of tax and capital gains are tax free. After ten years no tax is payable on withdrawal. There are penalties for early withdrawal.

Watch out for proportionally high charges because the amounts invested are small.

These schemes are often promoted for children. They are a way of involving children's savings in equities but most children are in a tax free position anyway, so other alternatives should be considered.

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