Unit Trusts

Unit Trusts are made up of a pool of savings by members (investors), whose investments are managed professionally by Fund Managers. These investments are pooled together and invested in selected securities such as shares, bonds and money market instruments or other authorized securities to achieve the objectives of the fund. Each investor receives units depending on the size and value of his/her investment. The underlying value of the assets of a Unit Trust is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs.

How a Unit Trust Works:

Investors buy units through the fund manager at the prevailing selling price (calculated daily). These units can be bought any time as long as the fund has not reached its maximum approved size. Unit holders can also sell their units back to the fund manager at the prevailing buying price. This re-purchase feature is what makes the units to be referred to as open-ended funds. The fund manager not only issues new units to incoming investors, they are also required to repurchase or redeem units from outgoing investors. The value of the fund or the price to be paid by unit holders or the amount to be received when the units are sold is based on the net asset value of the fund plus charges (if any).

It is important to note that in the case of funds where a substantial portion is invested in stocks and shares, the performance of the fund would be affected by the performance of the stock market. Hence, a unit holders selling price could either be higher or lower relative to the stock market’s performance when units were bought.

How Unit Trust Fund earn income:

Investors in unit trusts earn money through either capital growth or dividend income. Each unit in the fund represents a slice or share of the fund’s underlying portfolio of securities. Therefore if the value of the portfolio goes up, so does the value of each unit. This is called capital growth, or capital appreciation. If one sells the units at a higher price than they bought, a profit would be made. The converse will mean a loss is incurred if the units are sold for less than the price at which they were bought.

Any income received by the fund from its investments may be passed on to unit holders as dividends. However, dividends are not guaranteed if the fund makes little or no income. In such a case, the fund may not pay any dividend. Moreover, a fund that concentrates on achieving capital growth may have a policy of paying very little or no dividend at all. In such cases you may have to sell your units if you need to redeem some cash.

It is therefore important to read the prospectus to find out the type of fund being offered and whether it matches your investment objectives.

Benefits of investing in Unit Trusts:

  • Pooled resources and diversified portfolio.
  • Professional funds management by a registered fund manager.
  • Security of Capital; the investments are controlled by the Collective Investment Schemes Regulations and the Capital Markets Act
  • Liquidity; there is ease in selling and buying the units compared with investing directly in shares of companies where prices and opportunities to transact depend on the supply and demand at that time.
  • Convenience; they are easy to buy and sell at any time, with option to switch from an Equity Fund to a Money Market Fund or vice versa.
  • Flexibility; there is no fixed investment period.
  • Compounding; most of the fund managers compound the returns on monthly basis

How to Select a Unit Trust:

  1. The fund’s investment objective and strategy, investment limits, its current portfolio and any commentary on its recent performance. This should also give you a rough idea of the risk level of the fund.
  2. Check the past performance of the fund. Do not pay too much attention to periods of a year or shorter.
  3. Look for good and consistent performance over the longer term. Be warned that the past success of a fund is no guarantee of good performance in the future.
  4. See if there are any specific features and constraints which may conflict your needs or preferences. For example, the fund may have a policy of not distributing dividends, the minimum investment required may be higher than what you want to invest or the procedures for buying and selling of units in the fund may be inconvenient.
  5. When deciding which fund to invest, you should also look for information on the shareholders, board of directors and key management staff of the fund manager.
  6. You should assess the financial strength, track record and expertise of the company and its staff.

Types of Unit Trusts:

  • Money Market Fund
  • Balanced Fund
  • Equity Fund
  • Bond Fund

Caution:

  • Every investor has different goals, needs and constraints. Yet there are a number of general rules that every investor should follow for his or her protection;
  • Read the prospectus carefully. Make sure you understand where and how your money is to be invested and the risks involved. You should be aware of how a unit trust works, the charges and fees involved and your rights as a unit holder. The Investment objectives must be clearly stated or it gives leeway to the fund manager not to carry out your intentions of choosing the fund.
  • Ensure that you deal with only licensed fund managers. This will help you in the event that you are aggrieved by the actions of the fund manager for recourse from the relevant authorities.
  • Do not rush into a decision. Resist pushy salespeople. Units are not only sold during the initial period but throughout the life of the fund, as long as the units in circulation do not exceed the approved limit.
  • Keep good records of your investments and check any statements or certificates you receive to make sure they are correct.
  • Be wary of representations of spectacular profit or guarantees that you will not lose money or will earn a certain minimum return.
  • Resist any pressure to purchase a product that is inconsistent with your investment goals and the risk you want or can afford to take.
  • Resist any pressure to invest a larger amount of money in unit trusts than you think you should, for example by borrowing at a higher margin.