Invest with less risk by taking the stock market on trust

If you want to join in the excitement and potential rewards of the stock market, but are wary of the risks or only have a small amount to invest, an easy way in is through managed funds, such as unit and investment trusts.

These trusts pool together investors' money and use it to buy a large range of shares and other investments. A typical fund will invest in at least 60 different companies and may also invest in government bonds or have some money on deposit.

Some of the oldest investment trusts now have shares in several hundred companies. Each trust fund is managed by a fund manager. The aims of funds vary. So, for example, one fund may aim to track the stock market and will buy shares in the top quoted companies. Another fund may look to achieve higher growth and will invest in a potentially more profitable but more risky area of the market, such as small new companies.

Some of the most successful funds in recent years have been those that invest in specialist sectors such as technology or the shares of companies in the emerging markets of the Pacific rim. But not all the funds in these sectors have performed well. You may well find it useful to get professional advice.

If you are going to make your own choice of fund you should consult the performance tables published in weekend editions of the Independent, which rank funds according to the returns they have achieved.

Unit trusts are open ended, which means as more money is invested in the fund, so the fund is able to buy more shares and so create more units. An investment trust is a closed-end fund. When the trust is set up, it pools together all the money it attracts from investors and buys shares in a wide range of firms. Each investor receives shares in the trust, based on how much they have invested.

The investment trust starts trading as a company on the stock exchange. Once floated, the only way to buy shares in the trust is through the stock market, so share price is based on supply and demand.

The charges on unit trusts and investment trusts vary. With a unit trust there is an initial charge of up to about 5.25 per cent, plus an annual management fee of around 1 per cent. Investment trusts tend to charge an annual fee of around 1 per cent or less, but this can be more if it is a specialist trust.

The initial charge for buying shares in the trust is often low, but the stockbroker you buy shares through will have one price at which it buys shares and another price at which it sells.

The advantage of buying investment trust shares through a regular savings scheme is that the investment trust company is able to pool everyone's money together and can then buy in bulk, which means lower costs.

If you package your trust investment (up to pounds 6,000 a year) as a personal equity plan (PEP), all dividends and gains are tax free.

There is usually an initial charge and an annual fee on the PEP. This includes the charges on the underlying investments and, in the case of unit trust PEPs, may be lower than the usual costs on unit trusts because of the price war raging in the PEP market.