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Unit Trusts Reviewed

Unit trusts pool more than one investor’s money into one single fund, making it a form of collective investment that is constituted under a trust deed and managed by a professional fund manager.

Choose your quick section of our Unit Trusts review below.

A Quick Overview of our Unit Trusts Review:

Unit trusts are found in several countries and offer access to a wide range of securities. Each fund has a specified investment objective which determines the aims and limitations for its management.

 

Pros and Cons

✔️Pros❌Cons
Both small and large amounts can be invested, once off or over timeYou cannot choose the exact assets or ethical investments
Your assets are managed for you by professionalsYou pay fees, even if a fund does not perform good
It helps you to diversify your portfolio and hedge against market volatilityYou can still lose out if markets perform badly
You should be able to sell your units at any timeYour profits will depend on the fund manager’s decisions
Assets are held by a trustee and are safe if the firm goes bust

 

Unit trusts as a way to invest

A unit trust pools more than one investor’s money into one single fund, making it a form of collective investment that is constituted under a trust deed and managed by a professional fund manager.

Depending on the trust, this form of investment offers investors access to a wider range of investments in securities such as shares, bonds, properties, mortgage and cash equivalents.

A Unit Trust fund is professionally managed investment fund, and with the larger sum of capital, fund managers can invest the money into stock market, bonds, money market, property or others according to the investment objectives of the specific fund.

Investors in such a unit trust fund in fact own “units” of which the price is called the “net asset value” (NAV). The number of such units in a fund is not fixed, and more units are created when more money is invested in a unit trust as investors open accounts or add funds to their accounts.

Unit trusts are found in several countries and offer access to a wide range of securities.

Each fund has a specified investment objective which determines the aims and limitations for its management.

 

Investors can benefit from the following to achieve their financial goals with unit trusts:

It poses a low risk, as it invests in many different sectors or asset allocations

Funds are managed by professionals

Unit trusts are more liquid than shares

I creates an opportunity to invest in bond markets or foreign stock markets, where individual investors would not normally be able to invest.

 

History of Unit Trust Funds

The first unit trust was launched in 1931 in the United Kingdom by M&G to match the comparative robustness of United States’ mutual funds after the 1929 Wall Street crash.

The first trust was called the ‘First British Fixed Trust’ and had a fixed lifespan of 20 years. It was relaunched as the M&G General Trust and later renamed as the Blue Chip Fund.

Less than 10 years later there were around 100 trusts in the UK, valued at about £80 million.

 

How unit trusts are structured

A number of collective investment schemes exist: Unit Trusts, Open-ended investment companies, Mutual funds, Unit investment trusts and Closed-end funds, all with similar (and sometimes confusing) objectives. Other variations include open-ended and closed-ended, business trust or management companies and actively managed or un-managed funds.

 

Unit Trusts

These Trusts are organised as business trusts and the legal owner of the underlying assets is the trustee and the unit-holders the beneficiaries. Unit Trusts have a “bid-offer spread”, meaning the investor pays more to buy units of the trust than they receive when selling it, with the difference going to the trust management as a profit.

 

Open-ended investment company

Such entities have a company form with a single price for purchase and sale of units (thus no bid-offer spread), so they are similar to mutual funds.

 

Mutual funds

These funds are open-ended, actively managed funds and a popular form of collective investment. As with Unit Trusts, investors are unit-holders and there can be unlimited units issued. Units can increase or decrease according to net sales and repurchase by existing holders.

Open-ended mutual funds do not have a bid-offer spread, but they may have sale charges, known as “loads” and other fees paid to fund management.

 

Closed-end funds

Closed-end funds are collective investment models with a fixed number of shares issued. It is not redeemable from the fund. Investors own shares and not units and buy and sell these shares on the stock market, not from the fund itself. New shares are not created.

 

Exchange-traded funds (ETFs)

ETFs are also traded in the market and not bought and redeemed from a fund. The price is however not only determined by the valuation of the market, but trades in a narrow range close to its net asset value.

 

Unit investment trust

This kind of trust is an exchange-traded fund with a fixed (unmanaged) portfolio of securities and a fixed life-span before it liquidates, and its net asset value is distributed as proceeds to the unit-holders. It differs from a unit trust in being closed-end and unmanaged, with a termination date.

Unitholders own trust property and a trustee administers the trust with a fiduciary duty to treat unit holders equally.

The trustee appoints a fund manager to manage the investment of the trust assets and the fund manager in turn runs the trust for a management and performance fee.

Profits of the trust are either distributed as income to unitholders or reflected as capital gain in the unit prices when sold.

The trustee ensures that the fund manager keeps to the fund’s investment objective. Either of them may also appoint a custodian to further safeguard the trust’s assets.

 

How do one make money with Unit Trusts?

Unit trusts are divided into units with different prices. An open-ended fund allows that new contributions to the pool can be made and that withdrawals from the pool are also possible.

These prices directly influence the value of the fund’s total asset value. When money is added to the trust as an investment is made, more units are created to match the current unit buying price. In the same way, whenever units are taken, assets are sold to match the current unit selling price.

Fund managers make money through the difference between the price of the unit when bought – the offer price, and the price of the unit when sold – the bid price, also called the bid-offer spread and varies according to the kind of assets managed.

 

Bid-offer spread, and other technicalities explained

The fund manager makes a profit in the difference between the purchase price of a unit (or offer price) and the sale value of units (or the bid price). This difference is called the bid–offer spread and will vary depending on the type of assets held. It may be anything from a few basis points on very liquid assets like UK/US government bonds, to more than 5% on assets that are more difficult to buy and sell. The trust deed may give the manager authority to vary the bid–offer spread to reflect market conditions, to better control liquidity. In some jurisdictions the bid–offer spread is called the “bid–ask spread”.

A manager can collect an annual management charge (AMC) of 1 to 2 percent of the market value of the fund to cover the cost of running an investment portfolio. Other costs than the AMC, incurred in managing and dealing the underlying assets, will usually be borne by the trust.

In a unit trust, units are managed within what is known as the “Managers Box”. The Box Manager of the fund will make a decision at each valuation point whether or not to Create (add) or to Liquidate (Remove) units based on the final net sales and redemptions prior to the next valuation point where the Fund is priced on a “Forward Basis”, or at the actual valuation point where the fund is priced on an Historic basis. Forward pricing is the most common.

Each fund has a specified investment objective to determine the management aims and limitations. The underlying value of assets is 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

A unit is created when money is invested and cancelled when money is divested with the creation price and cancellation price not always corresponding with the offer and bid price. These prices are allowed to differ and relate to the highs and lows of the asset value throughout the day. The trading profits based on the difference between these two sets of prices are known as the box profits.

In the UK many unit trust managers have converted to open-ended investment companies (OEICs) with OEICs normally having a single price for purchase and sale. Recent regulatory changes however now permits dual pricing too, in line with unit trusts.

 

Can one invest in Unit Trusts in South Africa?

In South Africa the unit trust industry is governed by the Unit Trust Act drafted in 1947. Over time amendments had been made and the unit trusts industry in South Africa is currently regulated by Financial Services Board (FSB).

The FSB is an independent institution that oversees the South African non-banking financial services industry including retirement funds, short-term and long-term insurance, companies, funeral insurance, schemes, collective investment schemes (unit trusts and stock market) and financial advisors and brokers.

Unit trusts in South Africa are included in asset portfolios such as equities, bonds, cash and listed property, in which investors can buy units and spread their risk, whilst getting the benefits of professional fund management.

 

The following types of unit trust funds are available in South Africa:

Equity funds that grow capital by investing in the broader stock market or in specific equity sectors such as resources, financial and industrial funds.

Fixed Interest Bond funds which invest in a variety of interest-bearing assets such as bonds and fixed deposits.

Income funds that invest in a variety of interest-bearing assets such as bonds and fixed deposits.

Money market funds, also known as cash funds, that allow investors to “park” their money short-term.

Asset allocation funds, or balanced or managed funds where a fund manager invests in a spread of assets such as equities, bonds and cash, depending on market conditions.

Global funds where unit trusts offer exposure to international markets with a range of international rand-based and foreign denominated funds to choose from.

 

How do Unit Trusts work?

The basic value of assets in a unit trust portfolio is determined by the number of units issued multiplied by the price per unit, with transaction fees, management fees, and any other associated costs subtracted.

Fund managers run the trust for profit and assigned trustees ensure that the fund manager runs the trust according to the fund’s investment goals and objectives. The trustees must manage the assets on behalf of a third party, whose interests come first.

Owners of unit trusts are called unit-holders, and they hold the rights to the trust’s assets. Registrars act as middlemen between the fund manager and other important stakeholders.

 

How to buy and sell Unit Trusts in South Africa

Any investor can buy units in a unit trust fund at a price calculated at the end of each day and usually published by newspapers from a management company. There are two prices, the unit trust buyer’s price (the price at which one buys units from a unit trust company) and the seller’s price (the price at which you can sell units back to the unit trust company).

To buy units is easy and you can invest a lump sum or cash, accompanied by an application form to a chosen unit trust company. If you prefer to invest regular monthly amounts, a debit order form should accompany your application form when purchasing units.

 

Benefits of investing in Unit Trusts

The main advantages of investing in Unit Trust funds is the reduction in investment risk through diversification and having the peace of mind of the funds managed by approved professional investment managers.

 

The main benefits include the following:

 

Affordability

As unit trusts are a collective investment scheme, investors can start with a low investment amount.

 

Diversification

Investors are investing into a diversified portfolio of investments; hence risk is spread out better.

 

Liquidity

Most investors prefer an investment to be liquid, that means being converted back to cash easily, a feature that unit trusts provide. Some funds can even return an investment to cash within the same day.

 

Professional Fund Management

Unit trusts fund managers are approved professionals and the industry highly regulated. They are properly licensed, and their background and expertise ensuring structured decision making according to sound investment principles. This expertise should generate above average investment returns for unit trust investors in the long run.

 

Investment Exposure and Access to Asset Classes

With unit trust investments, individual investors who may otherwise find it difficult to get exposure to particular asset classes, can spread money around several asset classes concurrently.

 

Reduced Costs

Pooling money with that of other investors gives the advantage of buying in bulk, making dealing costs a smaller part of an investment. Because fund managers invest in larger amounts, they are able to get access to wholesale yields and products, which are impossible for individual investors.

 

A regulated Industry

With the introduction of unit trusts came regulation from various regulators. The variables relating to the unit trust industry is governed by various legislations to protect the interest of the investing public.

 

Are Unit Trusts for You?

If you think of investing in unit trusts, the following is important factors to consider:

What is your investment objectives – Why are you investing? Is it for retirement income, a bond, or a holiday home? The answer will determine which funds are suitable for you.

What is your time horizon – Do you need access to your capital in six years or six months’ time? You need to choose a fund that matches your time horizon.

Do you need protection from inflation – Do you want to protect your capital from being eroded by the cost of living? If so, you need to choose a fund that will produce returns well in excess of inflation over the long term.

Get the market timing right – Since the average investor finds it difficult to time the market, you may consider phasing in your investment over time.

 

Conclusion

Whereas mutual funds are investments made up of pooled money from investors which hold various securities, such as bonds and equities, a unit trust differs in that it is established under a trust deed and the investor is effectively the beneficiary of the trust.

Unit trusts are unincorporated mutual funds that pass profits directly to investors rather than reinvesting in the fund.

Fund managers run the unit trust and trustees are often assigned to ensure that the fund is run according to its goals and objectives.

 

FAQs

What is a unit trust?

It is a pool of funds that investors contributed to, put into an investment scheme managed by a unit trust company and invested on behalf of the contributors.

 

How do I invest successfully?

  • Don’t borrow money to invest.
  • Only use money that can be invested for longer than three years or more.
  • Spread your investments in an unstable market.
  • Start selling units gradually when your planned investment term ends.
  • Don’t let short term fluctuations discourage you.

 

 

For what can you use unit trusts?

Unit trust investments can be used for financing a house or car, supplementing pension plans, endowment assurance, deferred compensation, estate costs, income tax relief and buying out of interests in company.

 

Can I lose money if I cannot continue to invest?

You can cancel regular monthly investments and repurchase your total unit trust investment to date or you can cancel regular investments and leave the unit trust investment to grow as it is.

 

Must I invest a lump sum?

No, you can also invest with monthly contributions.

 

Should I invest monthly or make lump sum investments?

Lump sums can take advantage of times when the stock market is low, or inexpensive but monthly investments takes advantage of cost averaging and may be more affordable.

 

Can an investor switch between funds and what is the cost?

Yes, you can change between funds, but it must be requested in writing. There will be a charge of between 0 and 1,5%, depending on the company.

 

What is the difference between high growth and high income?

High growth aims to provide a large lump sum at the end of the ideal investment period, say five years, with smaller twice yearly or quarterly dividend payments.

High income aims to pay out large twice yearly or quarterly dividend sums instead of aiming for a large lump sum at the end of an investment period. Income payments can be reinvested though.

 

Why are there so many different types of trusts?

Many investors believe that one sector will outperform another. You are not restricted and may invest in all of them.

 

How do you buy unit trusts?

Payment usually takes place by either delivering the amount physically to your nearest branch, or by arranging a debit order with your bank.

 

Is your investment in unit trusts protected?

Yes. The Act stipulates the manner in which the portfolio must be spread, thus reducing the investment risk. The Act also stipulates that the money must be kept in trust, thus protecting investors against fraud.

 

How do I sell my units?

Written notice must be given and a repurchase form must be completed for this purpose. The units will be repurchased at the ruling price on the day the instruction is received.

 

Are there any tax benefits for me if I invest in Unit Trusts?

Yes, at present an investor can benefit in the following ways:

Capital growth – normally tax free, provided you are not classified as a dealer in shares.

Dividends are tax free.

Interest is fully taxable after the maximum amount allowed is deducted from your total interest income.

 

What happens when an investor die?

An investment in a unit trust may be bequeathed. It can also be divided on an equitable basis amongst more beneficiaries in a will.

 

May an investor invest in somebody else’s name?

Yes, you may invest in your wife/husband’s name, or on behalf of your children or grandchildren.

 

What is a buyer’s and seller’s price?

The buyer’s price is the price at which you buy units from the unit trust company, that is every time you invest money in unit trusts.

The seller’s price is the price at which you sell your units back to the unit trust company.

 

Can anybody invest in unit trusts?

Before you consider investing in unit trusts, you should ask yourself the following:

Am I prepared to invest my money for a minimum term of about five years?

Do I have adequate life assurance?

Do I have a savings account?

If you have answered “yes” to all of these questions, unit trusts are probably right for you.

 

4.7/5 - (30 votes)
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