Don’t trust a Unit Trust

In his third investment article aimed at writers, David Craig gives advice on Unit Trusts.

If you’re looking for somewhere for your savings, you’ll find a queue of people - banks, financial advisers and many others - all eager for you to put your cash into unit trusts. Why? Because they care about your wellbeing? Or because they make massive commissions from flogging unit trusts? In Britain we pay an astonishing £59m every working day to unit trust managers and to the people who sold us those unit trusts. That’s £59m a day - £15bn a year - being taken from our savings and pocketed by other people. Unit trusts will make you very rich - but only if you’re a unit trust manager or salesperson. If you’re an ordinary saver, they’ll only make you poorer.

With savings interest rates at almost zero and likely to stay there for several years, many savers are being tempted to put their money into unit trusts in the hope of better returns. But when you buy into a unit trust, you can quickly lose a lot of money

Say you put in £10,000. You immediately lose about 5% (£500) just for investing. Most of that goes in commission to salespeople. (You can avoid losing this 5% by using a funds supermarket, but most advisers and salespeople don’t mention this as they’d lose their commission). Then you lose about 3% (£300) a year in management and dealing costs. And when you withdraw your money, you lose another 5% (£500) because the price you sell your units is usually about 5% lower than the price you buy them. So, if you hold your units for five years, you generously give 25% (£2,500) of your money to multimillionaire managers and salespeople. (If you had £100,000, you’d be giving away £25,000 - £5,000 a year!)

Of course, you hope the fund managers will make your money grow. But ninety per cent of unit trust managers fail to beat the overall performance of the markets where they put your money. And almost no unit trust managers ever beat the returns on cash. If you put your £10,000 into a fixed-interest deposit account, you’d get about 3.5% a year - over five years compounded that’s 18.8%. Due to their high charges, a unit trust would have to grow by 43.8% (about 7.7% a year) over five years to beat a safe, no-risk cash deposit. That is just not going to happen.

But if you really want to put money into shares, this is what you should do. 1. Find some unit trusts you like. 2. Look on their websites and see which are the main shares they hold. 3. Buy those shares directly yourself. 4. Hold on to those shares for a few years, reinvesting your dividends in more shares of those companies. In this way, you get the benefit of the unit trust managers’ experience without having to pay them a penny. At the end of 5 years you’ll have 20% to 25% more than if you’d used a unit trust and at the end of 10 years you’ll have 35% to 40% more. As a meerkat would say ‘Simples!’