Introduction
Unit trusts and mutual funds remain some of the most popular investment vehicles in the UK, offering simplicity, diversification, and professional management.
Whether you’re a beginner building your first portfolio or a seasoned investor looking for efficient diversification, understanding how these funds work is essential.
This ultimate guide explains:
- What unit trusts and mutual funds are
- Their benefits and risks
- How they compare
- How to invest in them effectively in the UK
What Are Unit Trusts and Mutual Funds?
Both unit trusts and mutual funds are collective investment schemes — pooling money from many investors to buy a diversified portfolio of assets.
Unit Trusts
- Structured as a trust
- Investors hold units
- Prices are based on Net Asset Value (NAV)
- Commonly used in the UK
Mutual Funds
- Structured as companies (usually Open-Ended Investment Companies, or OEICs, in the UK)
- Investors hold shares
- Similar pricing mechanism to unit trusts
How They Work
- Investors pool money together.
- Fund managers buy assets like stocks, bonds, or cash.
- Investors own units or shares representing their portion of the pooled portfolio.
- Returns are earned through capital growth, dividends, or interest income.
Key Features
| Feature | Unit Trusts | Mutual Funds (OEICs) |
|---|---|---|
| Structure | Trust | Company |
| Pricing | Bid/Offer Spread | Single Price (NAV) |
| Regulation | FCA | FCA |
| Income Options | Accumulation or Income Units | Accumulation or Income Shares |
Benefits of Unit Trusts and Mutual Funds
| Benefit | Explanation |
|---|---|
| Diversification | Exposure to a wide range of assets with a single purchase. |
| Professional Management | Experienced fund managers make investment decisions. |
| Accessibility | Available through ISAs, SIPPs, and regular brokerage accounts. |
| Reinvestment Options | Choose between accumulating income or taking payouts. |
| Flexibility | Suitable for both beginners and experienced investors. |
Risks of Unit Trusts and Mutual Funds
| Risk | Explanation |
|---|---|
| Market Risk | Value of investments can rise or fall based on market performance. |
| Management Risk | Active managers may underperform their benchmarks. |
| Costs and Fees | Ongoing charges and entry/exit fees can erode returns. |
| Liquidity Risk | Less common, but certain niche funds may be harder to sell quickly. |
Active vs Passive Funds
| Feature | Active Funds | Passive Funds |
|---|---|---|
| Management Style | Manager selects investments to beat the market | Tracks a specific index |
| Cost | Higher (0.5% – 1.5% OCF) | Lower (0.05% – 0.3% OCF) |
| Performance | Can outperform or underperform benchmarks | Matches market performance |
| Examples | Baillie Gifford Managed, Fidelity Special Situations | Vanguard FTSE All-World Index, HSBC FTSE 250 Index |
Costs and Fees
When investing in unit trusts or mutual funds, be aware of:
- Ongoing Charges Figure (OCF): Annual management fee (e.g., 0.15% – 1.5%).
- Platform Fees: Brokerage or platform costs (typically 0% – 0.45%).
- Transaction Fees: Small costs for buying or selling.
- Performance Fees: Rare but charged by some actively managed funds.
How to Invest in Unit Trusts and Mutual Funds (UK)
1. Choose Your Platform
Popular UK platforms include:
- Vanguard (low-cost index funds)
- Hargreaves Lansdown
- AJ Bell
- Interactive Investor
- Fidelity Personal Investing
2. Select Your Tax Wrapper
| Wrapper | Benefits |
|---|---|
| Stocks & Shares ISA | Tax-free growth and withdrawals. |
| SIPP | Tax relief on contributions and tax-free growth until withdrawal. |
| General Investment Account | No limits, but taxable. |
3. Match Your Fund to Your Goals
- Growth: Equity-heavy funds or global trackers.
- Income: Income-focused funds or bond funds.
- Balanced: Multi-asset funds for moderate risk.
4. Start Investing
- Set up a lump sum or regular monthly contributions.
- Start small and build over time.
5. Monitor and Rebalance
- Review annually to ensure your fund still aligns with your goals.
- Rebalance if your portfolio drifts from your desired asset mix.
Example: Comparing Two UK Funds
| Fund | Type | OCF | Risk Level | Best For |
|---|---|---|---|---|
| Vanguard LifeStrategy 60% Equity Fund | Multi-Asset, Passive | ~0.22% | Moderate | Balanced, hands-off investing |
| Baillie Gifford Global Discovery Fund | Equity, Active | ~0.53% | High | Long-term growth seekers |
Who Should Invest in Unit Trusts or Mutual Funds?
Unit trusts and mutual funds are ideal for:
- Beginner investors seeking simplicity and diversification.
- Long-term investors focused on growth or income.
- People who prefer professional management over DIY stock picking.
- Investors looking for tax-efficient options within ISAs or SIPPs.
Tips for Choosing the Right Fund
- Check the OCF and platform fees.
- Look at the fund’s track record, but remember past performance is not a guarantee.
- Understand the underlying assets and risk profile.
- Consider active vs passive based on your goals and fee tolerance.
Pros and Cons Summary
| Pros | Cons |
|---|---|
| Easy diversification | Ongoing management fees |
| Professionally managed | Market volatility risk |
| Accessible through ISAs & SIPPs | Some funds underperform indexes |
| Wide range of options | Active funds can be costly |
Future Trends in 2025 and Beyond
- Growth of low-cost passive index funds.
- Increased popularity of ESG-integrated unit trusts and mutual funds.
- Expansion of thematic funds in areas like AI, clean energy, and healthcare.
- More transparent fee structures due to regulatory changes.
Final Thoughts
Unit trusts and mutual funds remain an excellent option for UK investors who want a simple, diversified, and flexible way to invest.
Whether you prefer low-cost passive funds or actively managed strategies, there are options to suit every risk profile and investment goal. By choosing the right platform, minimising fees, and staying invested long term, these funds can form a solid foundation for wealth building.
