Regardless of your individual priorities and risk appetite, we have an option for you.
However you wish to invest your money, we have something to meet your investment needs.
There are many ways to save and invest. In this article, we will explain the key differences between investing in a unit trust versus a stockbroking account. How do you decide which is best for you to meet a specific goal? While we will explain how the two different options work, it is always best to get professional advice about which may be best for a specific need, or how to combine both in your overall portfolio.
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| What is a unit trust and how does it work? |
| The main feature of unit trusts is that you have the benefit of pooling your money with other investors, and then enjoying the benefit of this pool of money being professionally managed according to a defined mandate. In other words, the mandate will specify what you will be exposed to, how the money will be managed and invested, as well as what the limits are from a risk point of view. |
A stockbroking account is held only for you, and you can choose exactly how this is invested or do it yourself.
With most investment portfolios, you don’t have the benefits of pooled money to access exposure to the range, breadth and depth of underlying shares as well as other instruments that unit trusts typically enable, but with a stockbroking account you can be very specific about what you choose to invest in and even define the ‘mandate’ for this. You can control exactly what you invest in and get access to professional management with a stockbroking account. You will require a significantly larger amount of money to invest to get exposure to certain types of shares and securities.
Unit trusts are more for the ‘hands-off’ type of investor who is happy to delegate the investment of their money to a professional in a portfolio that already exists.
It is simple and easy and generally has low minimum investments. Many offer diversified exposure to assets such as equities, bonds and property or are more specialist in their concentrated exposure to a single type of asset or asset class. You can, however, also invest in a stockbroking account with low minimums if you choose to do it yourself online.
Unit trusts are a form of collective investment set up under a trust deed.
Using investors’ pooled money, an investment manager will invest your money alongside those of fellow unit trust investors. There is a trustee in place to safeguard the assets and make sure the investment or fund manager is acting in the best interests of the investors or beneficiaries. The fund is divided into units, and each investor buys one or more of these units. You can sell your units if you decide to invest your money elsewhere. The price for each unit depends on the underlying value of the assets (net asset value, or NAV), and this is usually calculated each day. A unit trust is open-ended. That means the fund will grow and shrink as you buy and sell your units.
With a stockbroking account, the size of the account is only dependent on what you invest and the value of the underlying investments.
It is also not a legal entity setup under a trust deed. This gives you more direct control, but a little less protection.
| How do unit trusts and stockbroking accounts make money? |
| The unit trust makes returns by investing in well-performing assets, usuallycompany shares,bonds, property funds, and other assets. The fund will pay out any quarterly or bi-annual returns as either income or growth, and you can usually decide how you want to receive the money. Remember that returns are not guaranteed, and that you can also lose money. With an income-focused unit trust, the fund will pay you a regular income in the form of interest income or dividends via what is called an income distribution. For a growth-focused unit trust, you can choose to reinvest any returns to grow the size of your investment. With a stockbroking account your returns are also directly related to the underlying investments, and you are similarly exposed to the potential for markets falls. |
What are the different underlying investments that are available?
One of the main decisions you need to make when investing in a unit trust is whether you want it to be actively or passively managed. With an actively managed unit trust, a fund manager will aim to beat the market by buying and selling assets. With a passively managed unit trust, the underlying fund will grow and shrink according to an index (often calledtracker or index funds), and the fees tend to be lower because it requires less hands-on management. Another key choice is how and where the funds are invested. You can choose unit trusts that invest in particular sectors, assets or regions internationally, or those that take a more diversified approach. Some invest in other collective investments, which are called multi-manager or a fund of funds.
With a stockbroking account, you personally choose the underlying investments or give a professional manager the degree of control that you decide on about where and what to invest in. A great advantage of a stockbroking account is that you can borrow against the value of your portfolio.
Advantages of investing in unit trusts and stockbroking accounts.
- You can invest small amounts.
- Whether you choose an actively or passively managed unit trust fund, you don’t manage the underlying assets, but you will need to choose when it is a good idea to buy or sell your units. With a stockbroking account you decide whether to make each decision to buy or sell yourself or delegate this to a professional to do this for you.
- Diversification – most unit trusts invest in a variety of different assets, helping you diversify your portfolio to hedge against market volatility. With a stockbroking account you won’t necessarily have the same ‘built-in’ diversification, but you can use hedging instruments to offset the risk of specific investments dropping in price or losing value.
- Liquidity – you can usually sell your units or shares and instruments in a stockbroking account at any time, making it relatively simple to access your money if you need it through either. Unit trusts are much more appropriate if you are investing to be able to withdraw a regular income from your money.
You do need to be mindful that unit trusts and stockbroking accounts are both subject to market risks, specific instrument fluctuations in price, tax and estate duty consequences.
Please click here for a more detailed comparison of the two investment vehicles.
Diversify your investment portfolio to take advantage of the best of both worlds.
Both unit trusts and stockbroking accounts can provide access to local and international investment exposure and opportunities. It is best to seek professional financial advice about which may be better for your needs. We offer a range of ways to invest in a stockbroking account.
Click here for more information on online share trading.
We also offer an educational series of Stockbroking training videoswhere you can learn how to open an account, get an overview of our trading platform, learn trading market terms, and much more.
Click hereto access all the videos in this series.
Want to know more?
Tofind out more about our range of unit trusts and how it may be best for you to access a stockbroking account, please contact your wealth manager, private banker or advisor.
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