Unit trusts are a well-established way for people to invest in the markets. They allow individuals access to bigger portfolios where they can enjoy the gains and cost savings associated with the size and scale of these portfolios.

This article is the first in a series on unit trusts and delves into the basics of unit trusts, how they work and their benefits.

What are unit trusts?

Unit trusts are Collective Investment Schemes (CIS) that pool the money of investors, which is then invested in financial instruments such as equities (shares of companies), bonds and property. This pool of money is divided into equal units that investors buy in proportion to the amount of money invested. Investors then share in the fund’s gains, losses, income, and expenses.

There are a variety of unit trust options available to investors, according to the risk associated with the underlying assets. For example, income-related unit trusts are lower risk, while equity-related unit trusts are higher risk.

How they work

A management company (MANCO) is responsible for the administration of a unit trust. A fund manager makes the investment decisions for the unit trust, researching financial instruments that have attractive return prospects and investing the funds into them. The fund manager ensures that the unit trust is invested in line with its mandate and has the appropriate risk characteristics, and is paid a management fee by the investors. The MANCO monitors the assets in the fund and notifies the manager if there is a breach of compliance within the fund.

Unit trusts can be actively or passively managed. The goal of active funds is to beat a benchmark (usually the market) through research that informs more frequent or short-term trading decisions. As such, active funds require more direct involvement by the fund manager. On the other hand, passive funds are set up to track the market’s performance through a portfolio that mirrors a market index. The passive fund manager does not trade frequently, and usually, rebalances the portfolio every quarter. The management and administration costs are therefore higher for an active fund than a passive fund, because of the greater involvement required from the fund manager.

Unit trusts invest in listed securities and can, therefore, be priced daily as they track the value of the underlying assets and this allows investors to invest/withdraw money on any trading day. Prospective investors will send an application form to the MANCO, which then opens an account and buys the units of the unit trust for the investor. Sharenet Investments offer unit trusts – find out about the Sharenet BCI Global Balanced FoF and download its latest fact sheet here.

Benefits of unit trusts

Your money is in safe hands. The fund manager makes the investment decisions, but can’t access your cash. Instead, a custodian (trust company or bank) is responsible for holding and safeguarding the securities owned within a unit trust.

Unit trusts are regulated by the Financial Services Board (FSB) – soon to be renamed the Financial Sector Conduct Authority (FCSA) – and the legal structure prevents anyone from taking your money.

Unit trusts spread your money across many instruments, which if done right lower investment risk. It is unlikely that you will see a negative return on a unit trust over an investment period of more than five years depending on the type of unit trusts you are invested in.

You can easily trade unit trusts. There is no lock-in period for your investment, giving you liquidity with one days’ notice for withdrawals.

It is easy to track the performance of your investment. Most MANCO’s give online access and monthly statements to their investors. You can also find unit trust performance tables published in the media, and the fund manager will provide monthly fact sheets containing information about the unit trust’s performance and holdings.

Unit trusts are not just for the wealthy, you can invest in any unit trust by starting with a small lump sum or even a monthly debit order. This empowers investors to gain exposure to large assets like shopping centers and blue-chip companies with a small investment.

Conclusion

Unit trusts are an accessible, flexible and straightforward investment, making them one of the easiest ways to grow wealth. You decide how much and how often to contribute to the investment through lump sum payments or regular debit orders, and you can withdraw the funds and receive the cash within days.

Do you have any questions on unit trusts and how you can start investing? Contact Sharenet’s fund team or your financial adviser today.