Different unit trust fund managers select different assets into which they invest and we need this professional expertise to maximise our unit growth in the market! Fund managers watch the markets 24/7 and carefully manage the investment on your behalf.
You invest R 500 per month into a unit trust.
On the day of your first investment, you get a number of units depending on the price of the units on that day.
Say a unit is worth R 10 on that day - you will therefore get 50 units.
The price of that unit can go up (or down), depending on market returns from the investments made in your unit trust.
So, if the price rises to R 12, your 50 units are then worth R 600.
In your 2nd month, you invest another R 500 at R 12 a unit, so you then get 41.6 units and have then have a total of 91.6 units.
The price then rises to 14 per unit and your total value is now R 1,282.40.
Even if you do not invest any additional money from then on, those units still partake in the same process - you do not lose anything (but the growth potential those added funds could have given you, or if the underlying assets value drops)
This continues as long as you keep the unit trust alive.
If you take little risk when investing your money - like saving in a bank account, the chances are your returns will not beat the inflation rate and you will never grow your wealth.
In fact, you take your bank interest return and subtract the rate of inflation and that is really your return!
Every saving and investment product offers different risks and potentials of return. Things like how easily you can get your money when you need it, or how fast your money will grow and how safe your money will be.
Other risks to consider are, how the economy will perform, how the stock market will react to the economy over time and what inflation will be.
You also need to consider investment diversification, or not putting all your eggs in one basket.
By choosing different segments of a market into which to invest, like minerals and resources, financial, cash, commodity shares and so on, you can reduce your overall risk.
You can also go offshore and invest in markets and companies outside of South Africa, again reducing your overall risk.
Often, one section of the market may drop while others increase. Today, as a result of the pandemic lock down strategy, property is not performing at all. But, the medical industry shares are booming!
The way to "fight" this risk is to invest for the long term or choose a balanced or index fund that spreads risk across various market sectors.
If your risk appetite changes over time - say because of market economies - you can simply switch funds and join a fund with a risk profile better suited to your then needs. It is easy to do!
But, it is better to make a considered decision in the beginning and to stick with it than to be surprised later and shaken into dis-investing at the wrong time!
Chasing market returns is not a recommended investing strategy as it never works!
No one can tell you how a market will perform tomorrow, let alone today!
This pandemic is testament to that. From appallingly low returns early in 2020, the market was testing record levels of returns twelve or so months later! Investors who stood their ground and did not switch funds recovered their losses in a year!
The mandates of these funds give the managers the discretion and flexibility to invest across various asset classes, to achieve their goals.
You can also invest in a unit trust that invests in offshore companies, who do not face the same risks that South African companies do. You invest in rand for these funds.
strong>Global unit trusts have done well, with the greatest attraction being that of investing in companies that are not in South Africa.
In this way, you further reduce your investment risk by investing in other markets.
The South African market is only a small part of the global economy and if you do not look at offshore funds, you are really missing opportunities!
You can easily withdraw any or all you money - at any time you wish. You can do this online as well and it takes only a few days.
There are no penalties for withdrawing.
When you sell any of your units, or if you switch from one Unit Trust to another, you’ll be subject to Capital Gains Tax. Although never a real problem unless you have a huge fund, it still is a factor to remember.
The fund will advise you of any capital gain event.
You can cede your investment
You cannot borrow from the investment.
If you pass on - the investment is part of your estate when you die, and will be distributed in accordance with the instructions of your will.
You must consult the schemes/company product brochures and rules for comprehensive benefit descriptions.
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Peter Pyburn - Authorised Financial Services Provider, fully licensed to render financial services since 1991. Death and Disability Planning; Retirement Planning; Investment Planning; Healthcare and Estate Planning. More...
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Last update: May 11, 2022