For whom are unit trusts most suitable?

Unit trusts are a simple and convenient investment option for people who have a long-term investment horizon but do not have either the time, desire, or expertise to invest directly in financial markets.

Unit trusts can be particularly suitable for smaller, first time investors as they offer the opportunity to establish a broadly diversified portfolio of assets with a relatively small amount of money.

However, larger investors can also benefit from unit trusts as they provide access to the expertise of professional investment managers.

When you invest in a unit trust fund, your money buys 'units' in that fund, at a price that is struck for that particular day. Over the period in which you invest, the unit trust price will move up and down as the value of the investments with the unit trust fund rise or fall. Returns from a unit trust fund are typically calculated based on movements in the bid (or withdrawal) unit trust price and assume any income distributions paid to investors are reinvested in the fund as additional units.

Direct investment versus unit trust funds - 'pros' and 'cons'?

Once you have decide to invest, you have a choice of investing directly or through a unit trust fund. Which method is appropriate may well depend on your individual investment needs, however, using professional fund managers can generally provide better returns over the long-term.

Fund managers tend to outperform individual investors because:

-Their portfolios are constructed using a defined and consistent investment philosophy;

-Fund managers have a far greater access to quality information including company contacts, competitors and customers than do individual investors;

-Fund managers employ full-time investment professionals to monitor investment markets and the way economic developments affect these markets;

-The size of their portfolios generally means that fund managers can more easily reduce risk through greater diversification. They can also reduce risk by implementing sophisticated risk-management techniques involving the use of derivatives; and

-Fund managers have the economies of scale to reduce expenses through lower transaction costs. For example, fund managers generally pay much lower commissions to stockbrokers.

Diversification:"Don't put all your eggs in one basket"

Whether you want to invest in shares or across a broad range of asset classes, unit trust funds provide you with one benefit that can be very hard for individual investors to achieve - diversification.

Diversifying across asset classes

One way of reducing risk over short periods of time is to spread your investment over a number of asset classes - commonly referred to as diversification. Or, as the saying goes, "don't put all your eggs in one basket". Why? Because different asset classes tend to experience good performance at different times. By avoiding having all your money in just one investment, the high returns you may receive from one investment can help you offset any poor performance that might be occurring in another, thus enhancing the consistency of returns.

Diversifying within asset classes

The benefits of diversification do not just occur if you are investing across asset classes- diversification should also occur within asset classes. For example, you may decide to diversify within shares by investing in some companies in the construction, properties, industrial and finance sectors. Alternatively, you may decide to diversify within fixed income assets by investing in corporate and government bonds with varying maturity dates