A unit trust fund invests money paid to it, from many investors, into shares, bonds and property in the share market.
The unit trust splits this pool of money into equal portions, called "units" and allocates a number of units - based on the amount you invest - to you. Each unit has a price, which is based on the total value of the underlying investments in the fund.Over time, this unit price changes depending on the returns of those underlying investments the fund managers have chosen.
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.
A unit trust is transparent, low-cost, easy to understand and a convenient way to save for a specific need like education, supplement retirement savings or any other investment goal you may have.
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.
It is recommended that you run a unit trust for at least 5-years to get the potential of a meaningful return.
How do I choose the right unit trust for me?
There are many different types of funds to consider, all having different investment strategies and investing in different assets.Each fund has a specific investing mandate (rules) and risk profile and aims to achieve certain objectives.
1. Consider your Risk and Reward.
In order to grow your money you have to take some risk, as that offers the greatest potential of reward over time.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.
2. Consider the market fluctuations or market volatility.
The overall value of your unit trust is likely to go up and down as market prices change.This is known as fluctuation or volatility.
The amount of change over time depends upon which shares and what sector of the market your fund is invested into.
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.
The amount of risk you are happy to take with your investment is key to choosing which unit trust you should choose.
Remember, the younger you are and the longer you can invest for, the higher the degree of risk you can take.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 greatest risk you face is not investing at all!
3. Reducing Your Investment Risk
There are funds called Balanced Funds, which aim to create steady, long-term wealth for investors by balancing income generation, capital growth and risk of loss.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!
We have an excellent method to help you carefully and accurately choose a fund that is suited to your personal risk profile!
We will give you all the information on the risk and return profiles, the companies into which that fund invests and past performances of the fund you choose.
Interested? Please complete the form below and email it to us.
4. What return can I expect?
The return of your fund will depend upon the investments the fund manager has chosen.That, in turn, is governed by the fund's mandate.
There are no guarantees with fund returns and unit trusts can rise and fall over time.
5. How easily can get my money?
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.
6. Are there costs to consider?
Yes, there is an initial fee and an annual management fee to pay.The amount of the annual fee can vary depending on how well the unit trust performs.
Fees can be discounted for poor returns.
An average total expense ratio of 1.6% per annum is expected on unit trusts.
Then platform fees and expert advice can add as much as 1.5% per annum.
All fees are fully disclosed.
Why Unit Trust are Good for You
- Are professionally managed for you by managers with years of experience.
They have been through the up's and down's of the market and will look after the difficult investment decisions and monitor the asset composition of your investment, ensuring that you get maximum returns.
As we discussed, you can reduce your risk by diversifying where you invest. - Are diversified by a good fund manager, who will spread your investment across the different asset classes, such as equities, bonds, property and cash.
Then, should one sector decline more than others, you have some protection as your investment is spread across other sectors.
Your portfolio is not exposed to potential declines in the value of a single share or asset class. - Are one of the most affordable ways of investing.
From as little as R 500 pm or a lump sum of R 5,000 you can participate in an extraordinary wealth-building investment!
- Have no restrictive rules like endowments.
You can add to, withdraw or switch in your investment at any time. - Protected by law and governed in terms of a fund mandate.
You are protected from fraudulent and illicit investment practices.
Your money is held in trust for you, so even if the unit trust closes down, your money is safe. - Use the 8th Wonder of the World - value of Compounding Interest!
By re-investing your returns in the fund, you then get future growth on your past growth returns!General Information
Tax - Any income earned from your investment will be taxed according to your tax status and will form part of your taxable income in your annual tax return.
Dividend income earned from shares has a withholding tax of 20%, which is paid over to SARS for you.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.
Investing in unit trusts has traditionally yielded good returns, offering you the opportunity to build real wealth.
Good Communicators - you can access your statement online or receive regular updates from your fund manager.
You can also track the performance of your Unit Trust fund on a daily basis on investment websites or via the press.