About Unit Trusts

A unit trust is a collective investment that enables you to pool your money with other investors who have similar investment objectives.

It is not required of investors to be knowledgeable about shares as experienced investment managers invest this pool of money in different assets in financial markets.

This includes a wide range of local and international shares or equities (companies listed on a stock exchange), bonds, property, money market instruments and their derivatives.

The total value of the pool of invested money is split into equal portions called participatory interests of units (referred to as “units”).

When you invest in unit trusts, you buy a share of the units of the total fund. The unit price (also known as the net asset value (NAV)) fluctuates daily as it is dependent on the market value of the instruments in which the pool of money is invested.

The NAV price is calculated daily. In order to cater for all investors, a wide range of unit trusts funds are offered both in rand and foreign currency base.

This includes funds that generate income to capital growth in the medium to long term (three to five years and longer).

Units should be held for these periods to reap the full benefit of the investment and to sustain any market ups and downs.

Collective investments such as unit trusts are the most accessible, flexible, protected, regulated and transparent long-term savings vehicles.

Spreads risk

The risk in unit trusts is spread as it invests in a range of underlying assets, ensuring that all eggs are not in one basket. Assets that show a stable or better performance cushion the drop in price of other assets. Therefore your investment won’t necessarily perform poorly in a volatile market.

Easy and accessible

Unit trusts are a very convenient way of investing in markets which you otherwise would find difficult to access. At Sanlam Collective Investments you can invest in them with as little as R200 per month (monthly debit order) or a R5 000 lump sum.

Good returns

History proved that the average returns of unit trust compare favourably with returns from more traditional investment products. The longer your period of investment, the greater the opportunity for growth.

Expert decision-making

Unit trusts are managed by highly qualified investment managers who are responsible for making the investment decisions. Few people have the necessary time, skills or experience to actively manage their own investment on a day-to-day basis.

Value for money

Unit trusts are designed to give you good value. The pooling of money increases buying power, enabling investment managers to buy assets the small investor normally cannot afford. Fees are competitive and transparent. They comprise an annual management fee of 1-2% (excl. VAT) of the fund's market value and an initial fee up to a maximum of 5% (excl. VAT) of your investment. These usually decrease on a sliding scale for larger investments. The initial fee is deducted from the amount invested before units are purchased at the NAV price, and the annual management fee is deducted before income distributions are declared. Unit trust fees are deregulated and investors should familiarise themselves with all fees applicable to any investment as these may differ from fund to fund.

You always know how much you own

The NAV prices of units are quoted daily in the national press, and can also be obtained directly from the unit trust company. You can calculate the value of your investment at any time by multiplying the number of units you own by the NAV price of your fund.

You are protected

Your money is held separately from the managing company's assets in a trust. If anything goes wrong with the company, your money is safe. The local industry is also strictly regulated by the Registrar of Collective Investment Schemes, the Financial Services Board and each collective investment portfolio company's trustees to protect your investment. A vigilant financial press and analysts who continuously monitor the performance of the industry also protect you. In addition, you receive optional quarterly reports and an annual report listing all the assets in which your unit trust invests.

Flexible investment options

You can either invest a lump sum amount so that your entire investment immediately benefits from the growth and income potential of the chosen unit trust. Or you can make a regular monthly investment, an easier way of building up capital. The latter smoothes your investment into the market over time (called rand cost averaging) rather than being affected by a market movement at a particular time. Unit trusts are also transferable and you can invest in somebody else's name.

Easy access

Unit trusts are liquid so you can cash in all or part of your investment at any time and have ready access to your money.

Tax effective

Compared to other investment vehicles, unit trusts are tax effective in terms of Capital Gains Tax (CGT). Firstly, unit trusts are exempt from paying CGT. Unit trust investors only incur CGT when they sell their units in a unit trust. This allows investors to defer tax and to plan their investments appropriately. Secondly, the applicable CGT rate can be as low as 4.5%, depending on the investor's marginal tax rate, or as high as 10.5%, which is on par with shares. Relief measures such as the R17 500 exemption and the offsetting of losses against gains can also be used. .

There is a wide and ever increasing range of unit trusts available. Funds are classified as domestic, worldwide, foreign or regional depending on where the fund is invested. The former is South African, worldwide is a mix of domestic and foreign and the latter two are offshore. These categories are further classified into a second tier: equity, asset allocation and fixed interest. Domestic and foreign funds within these categories have similar risk portfolios.

What is your time scale?

Are you a short- or long-term investor? Although some unit trusts cater forshort-term needs, most unit trusts need at least three to five years for your money to grow, so that market fluctuations are smoothed.

What is your risk?

The type of fund you choose will depend on the amount of risk you are prepared to take. Factors are age, health, income, alternative liquid assets, financial/collective investment portfolio knowledge, and whether or not you have dependants. An investor seeking security and income should select a money market fund, an income fund, an asset allocation fund or a mix thereof. A more aggressive investor can select a general equity fund or an equity fund that invests in a specific sector of the market such as financial and industrial companies, resources and basic industries or smaller companies.

Note: The risk / return spectrum of fund of funds is dependent on the combination of underlying funds in which the fund is invested and its investment objective. Fund of funds allow investors to benefit from the investment talents of a range of investment managers. In theory this should even out the risk involved, depending on the type of funds selected.

Do you want income or capital growth?

Both these options require a match with the risk profile of the investor.

If you require regular income, you would choose an income or money market fund.

If you require both income and capital growth you would choose a bond or asset allocation fund.

If you require capital growth, you would choose a general equity fund, which is considered a medium risk fund with a broad spread of investments.

Alternatively, you could select a more specific equity fund that carries higher risk.