Cash (Unit) Trusts - Question.

baldbloke_2

I realize this is very basic but here goes ...

Purely as an example may I quote from the L & G Unit Trust - Cash Trust details.
Annual Percentage Growth last year 3.39%. Yield 4.01%.

I can understand that the yield is approximately the averaged returns they are getting less their annual charge - leaving an anual gross interest return to pass on to the investor. If I have that wrong then please tell me.

But what does the growth represent? Are they saying that in addition to the interest received the value of my investment would grow - say from £100k to £103K+ - over the year? I can not see how an investment based on simple bank deposits can grow in addition to interest payable.

I'm sorry if I am not too clear on this. For a large sum with very low (negligable?) risk a combination of interest AND growth in prospect sounds too good to be true and I am consequently a tad confused.

I am sure there are better yields and % growth rates around but this particular cash trust was known to me hence the example.

Many thanks

Alan

Chrismaths

I think that the 4.01 is the running yield, and 3.39 is the total return over the previous year (including income). There is no way you can get growth and income in excess of base rates from a cash trust, unless they are taking extra risk with bonds and/or derivatives. Best way to work out what it does is to read the prospectus.

baldbloke_2

Thank you for that. I have read the key factors documents for several of the funds and I do not understand why anyone would invest large sums with a fund where the returns are clearly no better than the High Street. The annual management charge of 0.5% renders decent if unspectacular returns as almost unacceptably low.
Looking through the returns of the cash trusts offered by all the managers on the Morninstar comparison chart it seems that about 4.2 % is the most one can expect and as low as 2% is offered by some.

In what way are these funds/trusts offering an investment 'opportunity' I wonder to myself?

Chrismaths

They aren't really. I use an offshore cash fund for the purposes of gross roll up and that's about it. Some managers use cash funds because the rates of interest they get on their cash balances is poor - sometimes less than 2%. In that context 4% is attractive.

Some people have bought into 'cash plus' funds that aim to give excess returns over cash by using derivatives and/or bonds, but to date none of them have passed the ronseal test.

cheerfulcat

baldbloke wrote:

In what way are these funds/trusts offering an investment 'opportunity' I wonder to myself?

Hi, Alan,

I would guess that cash unit trusts are very useful for people who have money trapped in some sort of " wrapper " like a pension or an insurance bond but who for one reason or another don't wish to be in equities.

Debt_Free_Chick

Just a thought ... isn't the growth in a unit trust effectively "tax paid" so unlike a savings account, you do not need to declare the increase in value and pay income tax on it?