Unit Trusts: The Investment Basics

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Unit Trust investments are open-ended investments in which investors pool their money together.

The investors’ money is managed by a fund manager and his team of analysts who use the investors’ money to buy holdings in the different assets classes, namely Cash, Bonds, Property and Equity.

Pure Unit Trust investments are open-ended which means that there is no specified end date or contract term when investing in these investment vehicles. Withdrawals can be made at any point in time without paying penalties.

Benefits of investing in a Unit Trust:

Professional Management

When investing in Unit Trusts the investors’ money is managed by professional fund managers who are highly experienced and posses the expertise required to manage these funds. These fund managers and their teams of analysts monitor markets on a daily basis and make investment decisions based on research and analytical tools that the average investor does not have access to.

More Investment Opportunities

Investors are exposed to more asset classes which provides them with more opportunities for growth as their funds are pooled together, whereas if an investor wanted to get exposure to the same asset classes on his own he would require a lot more capital.

Diversification

Due to the fact that Unit Trusts invest in a wider range of asset classes investors are able to spread their risk. This protects the investors’ investment as poor performance from any one asset in the Unit Trust will have less of an effect on the investors overall investment.

Aspects to consider when investing in Unit Trusts:

Risk Profile

Risk profiles represent the amount of risk that you are willing to take with your money in exchange for investment returns. By selecting Unit Trusts based on your risk profile you can ensure that the Unit Trusts you make use of match your appetite for risk.

Investment Objective

When researching a Unit Trust that you wish to invest in it is important to read through the fund fact sheet to get a better idea of what the overall objective of that specific fund is. This can give you a good indication of whether that specific fund matches your overall investment objective.

Investment Strategy

Even though the investment strategy might sound similar to the investment objective, these are two very different aspects to consider. The reason for this is that Unit Trusts with the same investment objective may use different investment strategies to achieve the same goal, such as investing in different asset classes or shares.

Time Frame

The investment time frame is the period for which you stay invested until you withdraw your funds from the Unit Trust. Different Unit Trusts are divided into different time frames, it is therefore very important to determine how long the investment time frame is for which you have to save for your specific goal.

Information your financial planner must disclose when recommending a Unit Trust

When recommending a Unit Trust, your financial planner must disclose the following information to you:

  • The overall objective of the Unit Trust
  • Reasons why the recommended Unit Trust is best suited to your needs
  • Possible risks (such as capital loss over the shorter term) associated with the Unit Trust recommended
  • Details about the fund and asset manager recommended
  • An explanation as to the expenses payable within the Unit Trust
  • Share of fees and commissions payable to the financial planner for services rendered

Different investment companies have different investment minimums for prospective investors. For those of you interested in investing in Unit Trusts you can either approach the investment company of your choice directly or speak to your financial planner for assistance.

For an indication of the returns achievable when investing in Unit Trusts have a look at the following articles:

Unit Trusts: Fees and Taxation
The Conservative Investor
The Moderate Investor
The Aggressive Investor

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About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.