Top FAQs about unit trusts
Correspondent | Friday May 17, 2019 12:13
There is a psychological attachment to saving in the desire to be financially stable, even though we are often drawn to spend rather than save or invest. Logic dictates, however, that if we have more information, we are more empowered to invest in our financial health, right?
With that, let us cover some of the frequently asked questions on Unit Trusts, a key vehicle for investment. More importantly, let us try to create an educational guide around this platform. You work hard and you expect your money to work even harder, but how so? These questions may assist in making the right decisions:
What is a Unit Trust?
A Unit Trust is a financial vehicle that allows investors, including the general public, to pool their money in a trust fund managed by professional Fund Managers, who in turn invest the funds in various assets. This includes equities, bonds and other authorised investments.
What does investing in a Unit Trust mean?
Investing in a Unit Trust essentially means that you own units of the trust fund. When you own even just one unit of the trust fund, you become one of the collective owners of the investments managed by the Fund Manager.
Is it safe to invest in a Unit Trust?
Absolutely! Unit Trusts are regulated by the Collective Investment Undertakings Act and the Management Company is regulated by the Non-Bank Financial Institutions Regulatory Authority (NBFIRA). The Act provides guidelines and the regulatory framework to protect the interests of the investing public. NBFIRA reads and approves all fund prospectus’ and annual reports; they may periodically audit the Unit Trust’s records and generally make sure that the fund is in order. To safeguard the investments, a Trustee is appointed who in turn takes custody and control of the assets of the fund. They also ensure that the Fund Manager adheres to the requirements set out in the trust deed.
What are the pros and cons of Unit Trusts?
Pros:
Access to professional Fund Manager – with knowledge and experience in the investment industry. The perfect investment vehicle for regular savers – both in the short term and long term.
Diversification – a well-balanced investment consists of several asset classes.
Liquidity – you can sell or buy units when the price is right at any time, there is no lock in period. For example, fixed deposit accounts have fixed period that may require a penalty to break it. Able to reinvest income which adds to income being compounded
Transparency – fees and expenses are very transparent, you know upfront what the costs may be.
Safety – regulated by NBFIRA and the appointed Trustee.
Cons:
Affected by market volatility – ups and downs of share market.
Management fees apply.
Do I need a lot of money to invest?
Investing in Unit Trust is generally affordable for most people. For example, the initial investment for the Kgori Balanced Fund starts from as low as a monthly debit order of P200.00. Look at a fund prospectus to get more information on its initial investments.
What rate of return can I expect?
The rate of return depends on the funds’ performance. The fund may distribute income monthly or semi-annually depending on the type of fund you invest in. The Unit Trust investment return has both income and capital growth where: Income return is paid from dividends earned on shares as well as capital gains realised on the sale of shares. The distribution of income will be paid to investors or reinvested on the investor’s behalf as per the distribution policy in the fund prospectus. Capital growth arises as a result of an increase in the value of the shares in the portfolio. Investors who sell at a higher price than the initial purchase price will realise a profit and similarly investors will experience a loss if they sell at a lower price than the purchase price. It is important to note that past performance, past earnings or distributions are neither a guarantee nor an indication of the fund’s future performance. Get as much information and professional counsel in making your decision.
What should I consider before investing in a Unit Trust?
You should always consider your investment objectives, risk profile, investment time horizon and your affordability at any point in time. Again, it is also key to get as much information and professional counsel in making your decision.
Is income received by Unit Trust taxable?
Dividend income received by the fund is taxed at source and interest income will be taxed when distributed and the Management Company will issue a tax certificate for this deduction. A withholdings tax on interest of 10% is applied for residents and 15% for non-residents.
Will the fees and charges affect the funds’ performance?
Fees and charges vary from fund to fund. The Management Company is allowed to charge fees such as the initial fee (if any), service fee and management fee. In addition certain fund expenses such as Trustee fees, brokerage fees, audit fees and admin fees are borne by the fund. Typically cash and bond funds have lower costs than equity funds; they also usually deliver, over the long term, less spectacular returns.
The Total Expense Ratio (TER) of the fund should also be considered, the lower the TER, the more cost effective the fund is.
In conclusion, look at investment platforms such as this and explore what works best for you. What is key to remember is that investments are not a quick-win or guarantee – you must be strategic, informed and open to understanding how it works. Indeed, create a culture of savings and investment in the long term, for this is the ultimate best practice.
*Sharifa Noor
Chief Operations Officer at Kgori Capital