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Many first-time investors get their feet wet in unit trusts. That’s usually because they are easy to buy. They are often thrust in front of our noses by bank managers when we are waiting for an appointment to discuss taking out a credit card or another form of debt.
So, are they good investments? As with all assets, it depends on which one you choose.
Unit trusts: quick definition
Unit trusts are collective investment schemes. These are legal vehicles established to protect investors who pool their cash in one fund. The fund, in turn, uses this money to buy a portfolio of assets.
You get different types of unit trusts. Some invest in shares, also called equities. Others invest in securities that pay interest, like government bonds. Within these groups, you get sub-categories of funds. Equity funds can specialise in specific shares, for example those of mining and resources companies or retailers.
Benefits of unit trusts
Reasons bank managers aren’t afraid to promote unit trusts to customers include:
Your money is in safe hands.
Although a fund manager makes decisions on your behalf, he or she can’t access your cash. The legal structure has been designed to prevent others from stealing your money. The Financial Services Board regulates unit trusts and the professionals who make the investment choices for you.
Investment risk is usually lower than for other types of investments.
A unit trust spreads your money across many investments. This means that if one investment doesn’t work out, you won’t lose all your savings. The flipside of this: if one investment does incredibly well, your entire holding won’t rise in value to that extent. So, there is less risk, but less return. Still, you have the comfort of knowing it is unlikely you will lose all of your money suddenly.
Unit trusts are easy to sell.
If you need your money, you don’t need to give a long notice period – as you would if you place your cash in a bank account with a good interest rate. You can have your money within days. This is an advantage if you have an emergency.
It is simple to track how your investments are performing.
You can keep tabs on how your unit trust is doing in several ways. You can access your statement online or find performance tables in the media. Your fund manager will also provide a regular update through fact sheets, which you can find on the website of your unit trust provider. The fact sheets provide quick summaries of how your investment is doing and what your money has been used to buy. So, you can see which companies you own if, for example, you have opted for an equity unit trust.
You don’t need huge sums to invest in big assets.
Unit trusts are designed for ordinary income earners. You can invest in lump sums or monthly debit orders. The latter usually start at around R500/month. Lump sums are often in the region of R50 000. Monthly investing makes it possible to build a large amount slowly on a limited income.
Ways to invest in unit trusts
The best way to invest in unit trusts is directly through a low-cost unit trust provider. Charges erode returns, so the less you pay to access an investment, the more cash will be left to grow for you.
A charge of 1% or more may not sound like much but these tiny percentages add up to a huge amount in time. So, aim for a fund that charges less than this.
Unit trusts are also available within other investment products. For example, they are often used as the underlying asset in a Retirement Annuity (RA) or savings policy. It is generally more expensive to invest through another product, however some companies are competing aggressively on cost.
Disadvantages of unit trusts
A major challenge with unit trusts is that there are more than 1 000 unit trusts available in the South African market, so how do you begin narrowing your options? Most of these funds are chasing the same investments.
Many unit trust providers will try to impress you with sophisticated sounding investment strategies and styles. Don’t be fooled by the names. Some might be called things like “wealth builder” but are poor performers compared to other unit trusts.
Probably the safest bet for an investor who is just starting out is an index tracking unit trust. This is a fund that aims to match the market performance of a stock market index at a low cost.
An index is a collection of securities that is given a name, like the JSE Top 40 – which represents the average performance of the biggest companies listed on the Johannesburg stock exchange. There are indices for specific sectors, so you might decide to invest in property stocks or industrial companies.
Another alternative to a unit trust is an Exchange Traded Fund. This is very similar to a unit trust. The main difference is that a unit trust is not bought and sold through the Johannesburg stock exchange whereas an ETF is bought and sold directly like a share.
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