I have been working for Personal Finance, first as a sub-editor and now as a writer, since October 2008, or just over eight years. In that time, an important thing (and there have been many, many others) I have learnt has been the value of unit trusts as an investment vehicle.
Unit trust funds fall under collective investment schemes and they are well protected by the Collective Investment Schemes Control Act, which, among other things, separates a fund manager from the assets in the fund, which are held by a trust. This means that if the fund manager gets into trouble financially, the assets in the trust will not be affected.
Back in 2008, my wife and I held endowment policy investments through one of the big life assurers. As these matured, we converted them to unit trust investments. In contrast with endowment policies, there is complete flexibility with unit trusts: you can invest when and as much as you want to, on an ad hoc basis or through a regular monthly debit order. You can withdraw money through selling units by giving a mere 24 hours’ notice. You are not tied into a contract, as you are with an endowment policy, which requires you to invest a single lump sum or make fixed monthly contributions for at least five years. (This type of contractual investment was one of former Personal Finance editor Bruce Cameron’s pet peeves, and in his weekly column he would regularly berate the life companies for subjecting policyholders who had broken the conditions of their contracts to “confiscatory penalties”, which could be substantial. I have no doubt that he was a great influence behind legislation forcing the assurers to be more lenient in applying these penalties.)
You don’t necessarily earn better returns in a unit trust than you do in an endowment policy – in fact, you aren’t guaranteed anything at all. But you do know exactly the return you are earning, and what the investment costs are, unlike the life assurance products, which, until recently, have been relatively opaque in this regard.
Although there are no guarantees, the wide range of available funds ensures you can choose a fund that perfectly matches your needs, from almost risk-free money market funds, which you can virtually use like a bank account, to high-risk equity and listed property funds, which are designed to give you inflation-beating returns over the long term.
A related thing I have learnt – the hard way – is that past performance is not a guide to future performance. Be wary of funds that are performing well now, if now is when you are investing. Because of investment cycles and the diverse investment strategies of different fund managers, a top performer in today’s market may be a less-than-stellar performer in tomorrow’s.
However, if you are already invested and your fund’s performance dips, it’s normally best to ride out these dips. Don’t forget, if you are committing a monthly amount to a fund, your money buys more units when the unit price is low than when it’s high.