Sitting back and watching the white-knuckle ride being followed by world stock markets, how many of us have smugly congratulated ourselves on not falling for the alluring spell of gambling on shares? It might be a somewhat sobering thought to note that most of us do, in fact, have something to lose in the current equity turmoil worldwide.

Pension funds and life assurers, apart altogether from the more sophisticated stock market players, are big investors in unit-linked funds, many of which have a wide exposure to share values.

But what exactly are these mysterious unit-linked funds and their close relatives, unit trusts; what distinguishes one from another and what should someone looking to buy into them consider?

How do they work?

Unit-linked funds allow the investor to spread the risk of the gamble on the performance of equities by investing in a spread of shares rather than in one particular stock.

An investment manager responsible for the fund collects money from a number of investors and uses it to buy shares in a number of different companies. For argument, let us say the manager collects £1,000 from 100 different clients; that gives them £100,000 to invest in the market

Over a period of time, say five years, that sum grows by, let us assume for the purposes of the example, 50 per cent. The original £100,000 has now become £150,000. That means that each of the 100 investors' £1,000 is now worth £1,500 before allowing for the associated charges. Charges mean the return from the investment will be less than the absolute performance of the unit-linked fund or trust as a whole. Most have an initial charge - around 6 per cent of the initial investment - and an ongoing annual charge of between 1 and 2 per cent. The scale of these charges is one of the elements investors should examine before determining where to invest their money.

One key difference between unit-linked funds and unit trusts is that the tax payable on the former are paid within the fund, whereas, with unit trusts the onus is on the investor. In Ireland, unit-linked funds are, by far, the more popular of the two but there is a marginal tax advantage to unit trusts in that their yield can be set against investors' capital gains tax allowance, permitting its full utilisation each year. However, in general, trusts - available from the four big banks - are targeted at more sophisticated investors.

Another, more important issue to study is the degree of risk associated with the investment. As with everything related to the stock market there are different elements of risk associated with different unit-linked funds and trusts listed on page 4 of this section. Managed funds provide a mix of equities, property, cash and government bonds - the more aggressively managed the fund, the higher the proportion of equities. There are also foreign equity-based funds as well as specialist property, cash or gilt funds. Each performs differently. While it is possible to buy units when the fund is first set up, many investors also buy and sell their stakes during the course of the investment. That is why the weekly tables of unit funds' performance carry both "bid" and "offer" prices. You buy units from the trust manager at the higher "offer" price and receive the lower "bid" price when you sell.

Why seek professional advice?

Unit-linked funds and, more particularly, trusts are not the plaything of the amateur. Most of the money invested in them comes from pension funds, endowment policies and other assurance schemes and if the individual investor is playing with the big boys, it is best to avail of professional advice.

They also, as stated above, carry varying degrees of risk. In Ireland, over the last five years, the funds that have performed the best have been those based on Irish equities - which have grown by almost 170 per cent. Aggressively managed funds have also outperformed their more cautiously managed rivals. But there is absolutely no guarantee that the same will be true in the future, especially in the increasingly uncertain market of recent weeks.

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