Is it possible to lose more than my stake in a Unit Trust?

MrMartyn

I've been reading about OEICs, EFTs and Unit Trusts.

As I understand it, if I invest in an OEIC or an EFT, I effectively buy shares in the company that manages it, and therefore the most I could possibly lose is the amount I pay for the shares I buy.

However, with a Unit Trust, I buy units in a fund. If that fund simply invests in shares, then presumably the worst case is that the shares become worthless and so my units become worthless and then I've lost whatever money I invested in the fund. But, what if the fund invests in something that is geared (derivatives?). If the fund goes bust with liabilities that greatly exceed its assets, what happens to the units and what happens to the unit holders (i.e. the people who invested in the unit trust)? Is it possible that the unit holders could be liable for the debts of the fund?

The reason I ask this is because I don't really understand what a "Trust" is, and more-importantly because I only wish to risk limited amounts of money that I can afford to lose without it adversely affecting my lifestyle. I don't like unlimited liability.

Thanks,
MrMartyn

Disclaimer: I am not an expert. My comments are my opinions only and should not be taken as advice. If you act on anything I post here you do so entirely at your own risk. I do not accept any liability for anything I post here.

quotememiserable

I'm pretty sure you buy units and they can't fall below zero, but I await someone who can confirm absolutely.
I guess this is an esoteric question really, since all shares inside a trust falling to zero is a nil scenerio effectively?

dunstonh

Think of Unit Trusts and OEICS as the same thing. There are few minor differences but fundamentally they are the same thing. Most Unit Trusts have moved to OEIC status over the years (as most of the differences are at fund management and administration where the OEIC is better for the fund manager/fund house- you dont see those differences).

They are so similar that most people dont even bother differentiating between them when discussing them. When you see someone talking about unit trusts then they mean unit trusts and OEICs. If you want to position the two then an OEIC is effectively a contemporary unit trust.

But, what if the fund invests in something that is geared (derivatives?).

You dont get gearing on unit trusts. Are you perhaps mixing up investment trusts with unit trusts? You get gearing on those.

jimjames

dunstonh wrote: »

You dont get gearing on unit trusts. Are you perhaps mixing up investment trusts with unit trusts? You get gearing on those.

Even on an investment trust it isn't possible to lose more than your stake.

Neither Unit trusts or investment trusts have unlimited liability so to the OP don't worry, you can't lose more than you put in. If the trust has more liabilities than assets then those lending to it will take a loss and the unitholders/shareholders will get nothing.

An investment trust is just a company and even with Northern Rock for example and their massive losses the shareholders weren't liable for picking up the tab, they just lost their investment.

sabretoothtigger

EFT would ETF ? They can be geared but you wont ever be in debt as they'd just go broke first

Normal shares can be geared if you buy on a margin account, this is fairly rare for retail investors. If you make it clear Im not an expert you shouldnt be sold anything that will cause debt

Avoid CFD and not sure what else, timeshares? Some companies may try to hard sell Structured products over the phone, I doubt this would cause debt but in any case avoid buying over a phone like that

Some share accounts clock up fees then threaten to sell shares if you dont pay.

derivatives

These expire worthless, lose all value but dont incur debt last I heard. In any case stay well away, some commodity funds hold them and that would be a high risk I think

ETN is exchange traded note or a debt based promise. You own nothing but it cant cause debt to you personally. Stay with ETF I think is best

jamesd

Spread betting is another way to lose more than your stake money. Selling options also.

Totton

Even when a UT or OEIC go bust you may still get some payout once the dust has settled. This happened to me with Govett Oriental IT, it was probably just over a year after the fund busted that a cheque arrived from the Bank of New York.