1. What is a unit trust (collective investments)?
A unit trust is the pooled money of many investors that is invested in the financial markets through a single collective investment scheme – called a Unit Trust.
Unit trusts invest in different markets and market sectors, while some invest across markets. You can make or lose money in unit trust funds, but the risk of losing money depends on where and how the fund invests.Generally the longer you can stay invested, the more likely you are to enjoy a good investment return.
A unit trust fund is made up of equal portions called units. Each unit has a price, or net asset value (NAV) based on the underlying assets of the fund. The underlying assets in a fund are made up of cash or money market instruments, shares, gold bullion, listed property, listed offshore shares, local government bonds and some use of equity derivative products are used to protect the downside.
The allocation of the above assets varies depending on the mandate risk profile of the unit trust fund. There is a wide range of portfolios available and Investonline.co.za has grouped them into 5 diversified portfolios – dependent on risk profile and client preferences.
Units are priced daily because the value of the underlying assets changes every day in line with market movements.When you invest in a unit trust, you are allocated units according to the amount of money you invest and the price of the units on the day you buy them.
The first unit trust fund in South Africa was launched in June 1965.As at 31 December 2008 about R661 billion of investors’ money was invested in some 884 unit trust funds.
2. How to buy unit trusts
You can invest in a unit trust in one of three ways:
- Directly, through a unit trust management company
- Indirectly, through an Independent Financial Advisor or via a Bank broker
- Through a unit trust investment platform either via a broker or via the Investonline.co.za website. A unit trust investment platform enables you the customer to invest, via a single administrative platform, into a variety of funds offered by different unit trust companies. This is the method which Investonline.co.za uses and we have carefully selected the Allan Gray unit trust investment platform as our online unit trust investment administrator.
You can either invest a lump-sum amount or a recurring amount every month by debit order.
3. Unit trust investment fees
When you invest in a unit trust, you have to pay fees as a percentage of your investment.Regardless of how you invest, all fees should be clearly disclosed to you upfront. You could be charged the following fees (and VAT will be added to them):
Upfront fees
Upfront fees are deducted on the first day of your new investment into a unit trust or unit trust portfolio (suite of varying unit trusts). This is a once-off fee/cost.Upfront fees usually range as follows and VAT must still be added:
- Unit trust management company initial fee: ranges from: 0.25% – 2.00%
- Financial Advisor initial fee: ranges from: 1.00% – 3.00%
- Unit trust platform admin fee: ranges from: 0.25% – 2.00%
Ongoing fees
Ongoing annual fees are deducted from your unit trust investment over the lifetime of your investment. This is usually disclosed as an annual fee percentage and deducted monthly in arrears over the 12 month period.Ongoing fees usually range as follows and VAT must still be added:
- Unit trust management company fee: ranges from 0.50% – 1.75% p.a.
- Financial Advisor fee: ranges from 0.50% – 1.25% p.a.
- Unit trust platform admin fee: ranges from 0.25% – 0.95% p.a.
Some unit trust funds also charge a performance fee component, based on the performance of your investment against a specified benchmark. Typically, your ongoing unit trust management company fee would then consist of a slightly lower fixed fee and a performance fee that could be low or even zero if the fund does not perform well, or higher if the fund does perform well and exceeds its stated benchmark. These particular fees will always be covered and explained on the Unit Trust fund fact sheet available on each and every unit trust fund under the “unit trust funds available tab” on our homepage.
4. Advantages of unit trusts
The main reasons why you should consider investing in unit trusts are:
Safeguard
A unit trust fund has an investment mandate, which is a legal contract that sets out the fund’s investment aims. The mandate will give you an idea of whether the fund is a low-, medium- or high-risk investment.
Funds appoint trustees (usually a bank or financial institution not affiliated to the unit trust company or fund manager) to look after the cash, shares or bonds that your fund owns.The appointment of trustees means that even if the unit trust management company goes under, your money will still be safe because it is held in a trust.
In terms of the Collective Investment Schemes Control Act (Cisca), unit trust funds are not allowed to invest more than 10% in the shares of unlisted companies.
Recourse
A unit trust fund is part of a well regulated industry and you have recourse if anyone tries to defraud you. Unit trusts are regulated by Cisca, which replaced the Unit Trust Control Act in 2002.
The Financial Services Board (FSB) regulates the unit trust industry and all unit trusts that are marketed in South Africa must be registered with the FSB.
Professional expertise
When you invest in a unit trust, you have access to the expertise and services of investment professionals known as asset managers or fund managers, who specialise in managing investments. They use the pool of money to buy underlying investments, such as shares, bonds and cash or a combination of these assets – on either the local or foreign market, depending on the type of fund in which you invest.
Fund managers are more likely to make sound investment decisions and stock picks than you are, because they have the expertise and experience.
Track performance
You can track the performance of your unit trust fund on a daily basis on investment websites or via the press. Personal Finance publishes a unit trust performance table every weekend in the Saturday newspaper.
The Personal Finance unit trust performance table publishes the return of your investment overone-, three- and five-year periods. It is a good idea to look at the performance history of a unit trust fund over thelonger periods before you choose to invest in that fund.
To calculate the value of your investment, simply multiply the number of units you own by the unit price, or NAV.
Diversification
Pooling your money with that of other investors who have similar investment goals allows you to own a diverse range of investments at a low cost.Many individual investors do not have enough money to invest directly in the range of underlying assets that unit trusts offer you at a low cost.
Unit trusts also give you access to investments, such as bonds, that have high minimum investment amounts that may be beyond your reach.The advantage of being diversified across a broader range of shares, bonds or other securities is that your investment risk is reduced. For example, if one share or market sector does not perform well, this may be mitigated by the strong performance of other shares or sectors in which the fund is invested.
Easy access to your money
There are no minimum investment periods when you invest in a unit trust, and you can cash in your unit trust investment at short notice.
You will be paid the value of the units 5-6 business days after your request to dis-invest, depending on if the instruction is received before or after 14:00.
Depending on the type of funds in which you invest, it is considered prudent to leave your money invested for about three to five years in order to recoup the investment costs and to ensure an appropriate return.
Interest income and tax
You can earn interest and/or dividends when you invest in a unit trust, depending on the type of fund in which you invest. Individual funds decide whether to declare these earnings monthly, quarterly or six-monthly.
The interest or dividends paid out to you is automatically reinvested, which will increase the number of units you own.
You may be taxed on the interest you earn from your investment and you may also pay capital gains tax (CGT) on the gains you make when you sell your unit trust investment.The tax you pay will depend on the applicable exemptions and on your tax bracket.
Understanding a unit trust investment platform
Providing choice at a reasonable cost is the primary aim of a unit trust investment platform.Investonline.co.za uses the Allan Gray investment platform and provides it to you online via the Investonline.co.za website with theadded benefit of risk-profiled portfolios and a comprehensive risk profile questionnaire calculator for our online clients.
Unit Trust investment platforms act like intermediaries between the investors and the unit trust investment fund providers, offering a simple and cost effective way to manage one’s unit trust investments.
Choice, flexibility and transparent access to a range of underlying funds on one administrative platform,consolidated reporting and the ability to switch between underlying funds, construct portfolios and re-balance easily and cost effectively are compelling reasons for investors to invest through an investment platform.
We understand that investors typically prefer the ability to spread their assets between a range of investmentoptions and managers, in a manner that is simple and convenient.
In addition to simplifying the investment process when investing through our online investment platform, the rebates and discounts given by unit trust fund providers (for exposure on the unit trust platform) are passed 100% entirely back to you the investor to make our offering that much more attractive and less expensive to other investment avenues.
