How to get started with investing

Investments can take many forms - shares, bonds (government and corporate), unit trusts, direct investments in private companies, property, art, wine, etc. - and your portfolio should contain a lot, a little or none or each of these asset classes depending on your attitude to risk and the length of time you can leave your money to grow.

Today we are going to look at unit trusts.

Unit trusts are essentially a pool of money which investors pay into to get exposure to certain asset classes. For example, you could buy a FTSE 100 share tracking unit trust which will track the performance of the 100 largest shares in the UK. For a small investor, it would be enormously expensive (with buy/sell fees) to buy a tiny holding in 100 shares and then constantly readjust it as the value of the companies within the FTSE 100 change and companies drop in and out of the index. A unit trust allows you to get the broad exposure you want to build a well balanced portofolio in return for a small fee.

Research is absolutely key when it comes to making investments and we would highly recommend looking at a web site called Citywire (click on the Fund Peformance tab), which shows the performance of nearly every unit trust available in the UK today. When looking at performance, remember not to be won over by the 3 month and 1 year performance and look for a fund that is consistently ranked in the top 25% and has a highly rated manager.

Before you go off to Citywire and see what sort of returns you might have achieved by investing in unit trusts, here a few key things to think about:

1. Fees can eat into the return you make on your investment. In general, the cheapest unit trusts our trackers and the most expensive are those that are actively managed in niche market sectors (for example, emerging markets or commodities). An index tracker can be a great place to start from just £50 a month.
2. Paying in a lump sum is more risky than paying in a small amount per month. This is because of a phenomenon known as pound-cost-averaging: by paying in each month, every month, you buy more units when the market is down and less units when the market is up, which smoothes out returns.
3. If you haven't already used it, make sure that you invest in a unit trust in an ISA so that you benefit from favourable tax treatment on your returns (unit trusts are subject to capital gains tax otherwise).
4. Finally, do not be swayed by the impressive returns from certain niche sectors. At the moment, some China funds have returned 30%+ over 3 months, but these funds are more volatile than others and can drop significantly in detiorating economic conditions (remember everybody over investing in technology in 1999/2000). That's not to say you couldn't have 5% of your portfolio here if you take a long-term view, but it is a case of buyer beware.