What is a unit trust?

Unit trusts allow people to pool their money to invest in low-risk, expensive shares on the Johannesburg Stock Exchange.  Known as blue chip shares, these shares are usually almost impossible for individuals to get their hands on because they are in demand and are very expensive as a result. However, if you take out a unit trust in these blue chip shares, the cost is shared among a large number of investors who pool the money that they have available.

How does a unit trust work?

The money you choose to invest is entrusted to a unit trust management company. The fund manager will need a minimum amount (about R100 to R500) each month. The management company will buy JSE shares on the investors’ behalf, meaning that you don’t need to have any knowledge of the stock exchange if you are considering investing in unit trusts. The company combines the shares in a portfolio and divides it into a number of units; these units will be distributed to each investor according to how much money each investor contributed.

What are the benefits of having a unit trust?

• One of the most significant advantages of unit trusts is their accessibility as people have the opportunity to participate on the JSE regardless of qualifications, age or occupation.
• Because you is entrusting their money to a manager, you doesn’t need any knowledge about the stock exchange and economic market. Rather, expert analysts will invest on your behalf and ensure that you get maximum returns for your investment.
• Unit trusts are one of the best saving options to beat the inflation rate because the compound growth of the investments remain relatively stable, regardless of how the inflation rate is playing up.
• When you take out a unit trust you won’t have to compete with SARS to get your earnings. The dividends income on unit trusts is tax free, and capital growth is also usually free from tax.
• You have direct access to your money invested in a unit trust and the management company can sell you shares immediately upon written instruction. This means that unit trusts can act as an emergency source of funds if necessary; but you are also able to keep your unit trust for as long as you want as you are not committed to a certain investment period.
• Unit trusts are offered on flexible terms, allowing you to change between investing regular monthly payments and investing a lump sum. You can also decrease or increase your payments according to your specific needs.

Hints and tips for investing in unit trusts

• Remember that unit trusts are more effective as long term investments. Most people would suggest that you keep it for 3 to 5 years so that you can let the investment mature. The money will grow slowly, but you will get more out of it than if you had the money sitting in a savings account earning minimal interest.
• Growth or value funds usually show decent return over time.
• There are a number of documents you will need to bring with you when you approach a management institution. These include:  a certified proof of address and proof of identity, bank account details and other such information.
• Instead of approaching a financial advisor, you can cut out the middle man by registering online as most banks have direct investment unit trust options.

Offshore Unit Trust Funds - Known as mutual funds everywhere else in the world but South Africa, offshore unit trust funds are the main generic investment product marketed to South Africans. For this reason many future articles within this website will deal exclusively with offshore unit trust funds.

Life Assurance Endowment Policies - Life assurance endowment policies are marketed in South Africa on a limited basis, mainly by South African life assurance companies with offshore operations, but a wide range of choice is available in offshore jurisdictions.

Property - Property is becoming an increasingly popular foreign investment.

Direct Securities Investment - These are direct investments into either bonds or shares.

Private Equity Investments - In the main private equity investment takes the form of South Africans either establishing an offshore company or buying shares as investment opportunities in an existing company or companies.

Funds of Funds: These unit trust funds wrap together different funds of different management companies, selecting what are considered to be the best funds in the various categories. If you select this route you should check the different types of funds to ensure they meet the demands of an investor in your country. The only decisions the fund of funds manager makes are the choice of funds and the weighting of the different funds. The underlying investment decisions are at the discretion of the various selected fund managers.

Multi-manager Funds: These funds bring together different portfolio managers giving them assets to manage. Rather than picking individual unit trust funds, multi-manager fund managers tend to pick individual investment specialists or specialist investment teams. The assets allocated to each to each specialist may or may not be managed within another unit trust fund. Multi-manager managers tend to have more to say about the underlying investments than do managers of funds of funds.

A unit trust pools your money with that of other people and invests it on your behalf. The pool is divided into identical units, each of which has an equal share in the assets in the fund. Unit trusts are designed to suit the different investment needs of different people. Some unit trusts offer you capital growth – increasing the value of your investment – while others concentrate on providing you with an income stream through dividends and interest. Risk varies from one unit trust to another.

In general, unit trusts focused on the share market carry more risk than those which spread their investments across different asset classes or which focus on the money market. Every unit trust fund is governed by a trust deed which falls under the authority and supervision of the Financial Services Board (FSB). The trust deed specifies the goals of the fund and all fees. Each trust is obliged to appoint trustees who act as custodians of the fund and ensure that it is managed within the terms of the trust deed.