Unit trusts shine in tough times
Date: 01 Apr 2009
We’ve covered unit trusts at length in previous articles on Money Matters, and we want to highlight them again.
Why do we like them so much? For several reasons:
1. They offer exposure to a range of investments that otherwise would be out of reach for the average income earner.
2. They are affordable, and therefore a suitable investment option on a tight budget.
3. They are accessible and highly liquid – they can be sold quickly and the money made available should you need it.
4. Over the years they have evolved into highly regulated entities, which means that the investor is protected.
1. A wide range of choices
Since the 1990s the choice of unit trust funds has burgeoned to include several new types, such as money market funds, bond and gilt funds, specialist equity funds (which focus on certain sectors of the stock market), and global funds. This means that with unit trust funds you can invest in just about any asset class, market sector and world region. You can also select a unit trust fund that suits your investment requirements (income stream, capital appreciation, or both) and investment risk tolerance.
A brief note on global unit trust funds: These are particularly appealing as ideally one should have some international exposure in one’s investment portfolio. The main reason for this is diversification. By investing in a global unit trust fund, you can benefit from exposure to different sectors and companies that either don’t feature or have limited representation in the South African market.
South African investors can choose from 390 offshore funds that have been registered with the Financial Services Board (FSB). Visit the FSB’s website, www.fsb.co.za for more information.
2. Affordability
Most funds have a minimum debit order ranging from R300 to R500 per fund. Some managers accept less per month, for example Community Growth at R50, a couple of the Stanlib funds, also at R50, and ABSA at R100. You can also purchase additional units within your fund on an ad hoc basis, so if you get a year-end bonus, for example, you can buy some units with it.
3. Liquidity
Most fund management companies will have the selling amount available to you within two to four days of you instructing them to sell your units. However, unit trusts are not short-term investment vehicles, so selling just because you need the cash could mean you lose out. Because market prices fluctuate daily, your units could be worth less today than they were yesterday. It takes years for a unit trust account to really come into its own and show overall growth. Operate your unit trust account with a medium- to long-term view (at least five to 10 years for good returns). Also, don’t sell your unit trusts if there is a downturn in the market. A temporary downturn in the market is an opportune time to be a unit trust investor, because your monthly investment will buy more units (as share prices etc will be lower). Sit tight and wait – you’ll reap the rewards when the market rallies later on.
4. Regulation of the industry
Unit trusts form part of the collective investments industry. The Collective Investment Schemes Control Act (CISCA) was introduced in 2003, replacing the Unit Trust Control Act of 1981. CISCA ensures that collective investment managers follow legislated best practice. Furthermore, every collective investment scheme (CIS) is governed by a deed, which falls under the authority of the registrar at the Financial Services Board (FSB). The registrar has the authority to inspect the work of the trustee and the manager.
Each CIS is obliged to appoint a trustee or custodian, and one of the functions of the trustee is to ensure that the manager operates the CIS in accordance with the deed. Another important function of the trustee is to act as custodian of all cash and securities in the portfolio. Underlying assets do not in any sense belong to the manager or Management Company, but are held on behalf of investors by the trustee. This provides important protection for investors.
Investors’ peace of mind is further ensured by a watchdog and coordinating body – the Association of Collective Investments (ACI) – which was established to promote the benefits of collective investments, and to facilitate the development and growth of the industry. The ACI acts as the custodian of codes of practice and standards throughout the industry.
Unit trusts are a highly recommended way to start investing, without having to wait while you accumulate sufficient funds to create a diversified share portfolio.
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