Small savers have route to big league

INVESTORS with limited funds can use unit trusts to gain immediate access to a diversified portfolio of stock market investments and spread the risk. That is one of the big selling points of unit trusts.

But many unit trust managers provide even greater accessibility by offering monthly savings schemes. Some allow entry to a trust from as little as pounds 20 a month, although pounds 30 to pounds 50 is more common. Some set the minimum as high as pounds 200.

This compares with the usual minimum for one-off lump sum investments of pounds 500 or pounds 1,000, though you will find higher and lower minimums. Thus monthly savings schemes can bring stock market investment within the range of almost anyone, and in recent years they have been widely promoted to the general public.

An extra selling point has been tax-efficiency. Unit trusts can be placed in a PEP, which allows income and capital gains to accumulate tax-free. Up to pounds 6,000 each tax year can be invested in a unit trust PEP. That is pounds 500 a month, more than enough to accommodate many people's capacity to save.

This tax-efficiency is justifiably a powerful attraction, especially if there are no extra charges for using a PE, as is often the case.

And it means that regular savings through unit trusts can be much more attractive than the traditional route to the stock market for small investors - the life insurance-based endowment policy.

Unit trust savings schemes offer much greater flexibility, both in what you put in and when you cash in the investment. You are not committed to waiting for a specific period before getting your money.

Less tax-efficient life insurance schemes usually tie you in for 10 to 25 years. And you are paying for an element of life insurance which you may not really need.

In theory, unit trust managers set low monthly minimums on the understanding that you will maintain payments. In practice, as long as most savers do keep paying in, the managers are unlikely to cause discomfort to those who fall by the wayside.

But regular savings schemes offer advantages in addition to low entry costs. They can provide a real chance to build up capital over time. Once a standing order or direct debit has been signed, it is easy to view the payment as simply another regular monthly outgoing from your bank account. Savings schemes provide a simple discipline.

Although their main benefit is the chance to build up capital, they also resolve the question of timing, a key problem in stockmarket investment. Stock markets are notoriously volatile over the short term.

A large lump sum invested at the wrong time may take longer than average to start showing a return if markets are at a peak and due for a "correction" - Cityspeak for a nosedive.

The converse is also true. A fortuitous investment when a market is in a trough can produce unusually good returns in a short time.

Regular saving schemes avoid this timing conundrum. Money is invested at peaks and troughs and at all points in between. You stand to benefit from what is sometimes termed "pound-cost averaging". The average cost of units bought through a savings scheme is actually lower than the average price of the units during the period of investment. You have got in at a lower than average price.

Pound-cost averaging is essentially a mathematical quirk. A constant monthly payment buys more units when the unit price is down, fewer units when it has risen. The real point is that regular saving avoids the risk of investing too much at a peak.

Thus, even if you do have a lump sum to invest, it may still pay to take a cautious approach, perhaps drip-feeding the money into a unit trust over a period of six to twelve months.

The uninvested money can still be earning something if it is kept in a decent deposit account. The right course of action depends on what view you take of the current state of the markets.