I. Introduction:

Unit and Investment Trusts, types of managed investment fund, similar to those known in America as mutual funds, that combine the money of their investors in a wide variety of stocks, shares, and money market instruments such as government or corporate bonds and bank deposits. Unit and investment trusts provide the investor with professional management of funds and diversification of investment among the securities offered by companies, governments, and other entities.

II. Unit Trusts:

Unit trusts are open-ended funds, meaning that the fund will redeem outstanding units immediately upon request. Thus, the number of units of a given trust is not fixed, but fluctuates as new units are sold to investors and outstanding units are redeemed. The offer price and redemption price of a unit trust are based on the market value of the securities in its portfolio, and are usually set once a day. On any given day, units are traded either on the basis of the price set the previous evening, or on the price to be set that evening. Historic pricing can mean that the units are priced unrealistically for prevailing market conditions, while forward pricing means that an investor can never be certain at what price units can be sold. The difference between the bid and offer prices is called the spread, and is typically 5 to 7 per cent. This forms the fund managements initial charge, which covers the cost of the trusts investment transactions and includes an element to cover commissions paid by the fund to financial intermediaries.

Open-ended investment companies (OEICs) are a type of investment fund, similar to unit trusts, which are common in continental European countries. Only authorized in the United Kingdom since 1996, the first UK-based OEIC was launched in May 1997. The major difference between OEICs and unit trusts is

that OEICs have fully tradable shares, with prices fluctuating constantly with their market value. This, coupled with their familiarity to European investors, means that OEICs are expected gradually to replace unit trusts for many types of investment.

III. Investment Trusts:

Investment trusts are closed-end funds, meaning that they have a fixed number of shares outstanding and are traded on the London Stock Exchange. They originated in the 19th century, created by wealthy families to look after their assets, and later became companies in order to allow wider trading of their shares and more investors to become involved. Shares in investment trusts are purchased and sold at the market price plus a commission; they may sell at a premiumthat is, above the value of their assetsor at a discount, below the value of their assets. Some investment trusts, called split capital trusts, have several different, separately traded classes of share, each entitled to a different aspect of the trusts investments, such as capital growth or income.

IV. Investment Objectives:

Unit and investment trusts are classed according to their investment objectives. Broadly stated, funds seek growth of capital or current income. Within these classifications lies a multitude of variations. Money market unit trusts, which many investors look upon as an alternative to a bank savings account, seek complete safety of capital in short-term loans to large institutions at money market values. At the other end of the scale, venture capital investment trusts seek high returns by investing in promising but speculative, small, and often unquoted companies. These funds entail greater risk than standard growth funds, which invest in larger, more financially secure companies with records of steadily increasing earnings. Funds that aim for current income may be speculative, investing in high-yield, high-risk securities such as American junk bonds, or conservative in outlook, investing in low-risk securities with a good record of paying dividends. Between the extremes are funds that are willing to take some risk for higher returns but are mindful of the need to conserve capital.

Balanced funds, seeking both growth and income, may invest in stocks, bonds, and other financial instruments. Sector funds put all their funds into companies in one area of business, such as property, or in one country or region of the world, such as fast-growing Asian economies. International stock funds and bond funds, gold and precious metals funds, and ethical funds are among the dozens of other categories and subcategories. Another approach is offered by index funds, which do not attempt to outguess the markets but simply structure their portfolios to duplicate one of the major stock market financial indices.

V. Methods of Distribution:

Unit and investment trusts may be sold by stockbrokers, by financial advisers, by a sales staff employed by the fund management, or directly by the fund to the investor. The last-named process carries no commission, or a low one. However, in the case of investment trusts, the fund will usually only deal once a week, meaning that an investor cannot be certain of the price at which an order will be executed. All funds have management fees regardless of distribution methods; this is typically 0.5 per cent of the funds value and is normally levied against income.

VI. Shareholders Rights and Benefits:

Owners of unit and investment trusts receive dividends derived from dividend income and interest earned on securities in the portfolio. Dividends are paid quarterly or twice yearly.

A variety of services are offered to shareholders by fund managements. Most funds provide regular investment schemes, in which investors may buy shares at regular intervals and have dividends reinvested automatically. Many financial institutions offer a so-called family of unit and/or investment trusts, allowing investors to divide their savings among funds with varying objectives but managed by the same sponsor and to switch from one fund to another at little or no cost.