IN A NUTSHELL A unit trust is an investment fund that pools money from multiple investors and invests it in a range of assets. An investment manager manages the fund to grow investors’ money over time.
Unit trusts offer a relatively simple, convenient way to:
- get exposure to a variety of assets – such as shares, bonds and cash – to diversify earnings and spread risk,
- at a relatively low cost (it’s more affordable than investing in all these different assets directly), and
- with minimal effort, as a professional investment manager selects, monitors and buys/sells investments on investors’ behalf.
Unit trusts are therefore generally considered a good investment option for beginner investors, or anyone who lacks the time, money, technical expertise, or interest to pick and manage investments themselves. (The words “unit trust”, “mutual fund” or just ‘fund’ generally all refer to the same thing. “Mutual fund” is more commonly used for CIS investments in the US.)
A unit trust is a collective investment scheme (CIS). A CIS refers to any investment where investment managers pool investors’ money to invest in a wide range of assets, many of which investors would not be able to access on their own with only a small amount of money. The risks and benefits are shared among investors in proportion to their investment amounts.
Different types of unit trusts
There are various categories of unit trusts to choose from, depending on the investor’s needs. Each fund has a different investment objective and risk profile.
Examples of unit trusts
- Balanced or multi-asset funds invest in a mix of asset classes such as shares, bonds and property, balancing risk and return for more stable outcomes.
- Equity funds invest mainly in shares. They are riskier than balanced funds but offer potentially higher returns.
- Income funds invest in interest-earning assets such as bonds to generate an income, which is paid out to investors monthly, quarterly, biannually or annually.
- Specialist funds invest in a specific industry, for example, renewable energy.
Global or offshore funds invest internationally, offering exposure to foreign currencies and economies.
Choosing a unit trust
Choosing the right fund will depend on your goals and needs, for example:
- By how much your money needs to grow
- How long do you have to reach your goal
- How much risk can you afford to take
Let’s explain:
Zethu (24) is a new mom and wants to invest to save for her son’s college fees. Her father, Alfred (60), wants to buy a car in five years, as he plans to move away from public transport routes when he retires.
Zethu can afford to invest in a high-risk fund, such as an equity fund, as she has many years to make up any losses before she needs to access her investment. Alfred’s priority is to protect his investment – if he loses money, he may not be able to buy the car. A lower-risk fund may therefore be more suitable for Alfred.
The same principles apply to a retirement fund wanting to invest in a unit trust. The retirement fund’s investment strategy – including its investment objective, risk tolerance and asset allocation targets – will determine which unit trust may be most suitable.
Further reading
Sources
10x: Unit Trust FAQs
FSCA: Collective Investment Schemes: The journey from saving to investing
Investonline: Local unit trust FAQs
M&G Investments: A guide to investing in unit trusts
Funded by
