U Is For Unit Trusts = A Diversified Portfolio

Unit trusts give access to a diversified portfolio by pooling investors’ money.

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

• Professionals manage your investments on your behalf

These professionals have a wealth of investment expertise and experience. You don’t have to make any difficult investment decisions or monitor the asset composition of your portfolio. This will be done for you.

• 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.

• 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.

• 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, as 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.

• 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. You are therefore 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.

Unit trusts are a medium- to long-term investment, so 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. Therefore give your money the time it needs to grow.

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