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Unit Trusts at a Glance

8 July 2019

A unit trust is a popular choice for investors who want access to blue chip shares and bonds, which are not cost-effectively available to direct investors with relatively small amounts to invest. In essence, a unit trust fund is a portfolio of investments that has been divided into units.

Each unit is valued daily, based on the value of the underlying investment portfolio. Depending on the type of unit trust fund, the portfolio could consist of shares, property, bonds and other fixed income assets – both locally and offshore. With the exception of a money market fund, the value of the units goes up and down as the value of the underlying portfolio fluctuates.

Unit Trusts offer Various Benefits to Investors

1. Professionals manage your investments on your behalf

These professionals have a wealth of investment expertise and experience, and take care of all difficult investment decisions so that you don’t have to. They’ll also monitor the asset composition of your portfolio, to ensure that you get maximum returns.

2. Risks are minimised with adequate diversification

The fund manager will diversify your investments across the different asset classes, such as equities, bonds and cash. This protects your portfolio from being too exposed to potential declines in the value of a single share or asset class, as performance is spread across a variety of underlying investments.

3. Unit trusts are one of the most affordable ways of investing

You can invest in the unit trust of your choice from as little as R200 a month, or a lump sum of R5 000.

4. Unit trusts have no lock-ins and you can add money or switch at any time

You can buy and sell units as you choose, but think carefully before you jump between unit trusts. Research shows that investors that switch often receive a significantly lower long-term return on their initial capital than investors who remain in the same fund across their investment period. Remember that no one manager outperforms his peers year after year – all unit trusts have periods of underperformance relative to other unit trusts in the same sector.

5. Your money is safe in a unit trust

By law, the fund manager has to invest the money in accordance with a signed investment mandate, which means you are protected from rogue or irresponsible traders. Your money is largely invested in liquid, publicly-listed investments, with regulations allowing a maximum of 10% to be invested in unlisted investments. Your money is held in trust for you, so even if the unit trust closes down, your money is safe.

Invest in a Tax-free Unit Trust

A tax-free unit trust works the same as a normal unit trust, except that you don’t pay any tax on your interest or dividends earned, and capital gains are also tax-free. This means that you don’t pay tax on the growth of your investment, making it a much more effective way to attain your financial goals.

This tax benefit only applies to SA tax residents, and is limited to a maximum investment amount of R33 000 per tax year or R500 000 over a lifetime. Any contributions over these limits will be taxed at 40%, so it is important that you keep a close eye on your contributions.

Once you've exhausted the maximum investment amount limits of your tax-free unit trust, you can start to invest in a normal unit trust, where there are no maximum limits on how much you can invest – only minimum investment amounts, which differ from fund to fund.

Give Your Money Time to Grow

With the exception of a money market investment, it is possible for the value of your investment to be worth less over the short term than the money you initially invested. This does not mean you should sell any or all your units at such times. To be able to outperform cash in the long run, you need to take on the volatility that accompanies the other asset classes. No risk, no better-than-cash return – so give your money the time it needs to grow.


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