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 investments in the fund.
Over time, this unit price changes depending on the returns of the investments that 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.
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 future market returns from the investments made in your unit trust.
So, if the price rises to R 12, your 5 units are then worth R 600.
In your 2nd month, you invest another R 500.
At R 12 a unit, you then get 41.6 units and you then 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.
It is recommended that you run a unit trust for at least 5-years to get the potential of a meaningful return.
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.
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 what you are getting!
Every saving and investment product has a different risk and 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.
There are also other risks to consider such as 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 diversification - 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, medical share are booming!
The way to "fight" this risk is to invest for the long term or choose a balanced or index fund that spreads 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 disinvesting 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 choose individual securities across various asset classes, to achieve its goals.
You can also invest in a unit trust that invests in offshore companies. You invest in rand for these funds.
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!
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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.
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.
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.
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.
Medical aid pays healthcare costs.
What if a disability STOPS your income?
Last update: May 27, 2021
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