Ever heard the saying “Don’t put all your eggs into one basket?” That’s the main idea behind unit trusts. Instead of putting all your money in one investment (which could go south), you spread your money across a mix of funds managed by a fund manager who knows the landscape.
If you are looking for a way to invest your money in the financial markets, but you don’t have the time, expertise, or resources to do it yourself, you may want to consider unit trusts. Unit trusts are a type of collective investment scheme that allow you to pool your money with other investors and have it managed by a professional fund manager. But what exactly are unit trusts and how do they work?
Unit Trusts Are Like Shopping Malls
A unit trust is like a shopping mall that offers a variety of stores and products for different tastes and budgets. You can buy a unit of a unit trust, which gives you a share of the ownership of the mall and its profits.
The mall is managed by a fund manager, who decides which stores to rent out, how much to charge, and how to maintain the mall. The fund manager also collects the rent from the stores and distributes it to the unit holders as dividends.
The stores in the mall are the different assets that the unit trust invests in, such as stocks, bonds, cash, etc. The fund manager selects the assets based on the objective and strategy of the unit trust, which can vary from conservative to aggressive, from income-oriented to growth-oriented, from local to global, etc. The fund manager also monitors the performance of the assets and adjusts the portfolio accordingly.
The advantage of buying a unit of a unit trust is that you get access to a diversified portfolio of assets that you may not be able to afford or access individually. You also benefit from the expertise and experience of the fund manager, who can make better investment decisions than you. You also save on the costs and hassles of buying and selling individual assets yourself.
Unit Trusts Are Like Fashion Brands
A unit trust is also like a fashion brand that offers a range of products for different customers and occasions. You can choose a unit trust that suits your style, personality, and goals.
For example, if you are looking for a casual and comfortable unit trust that can provide you with steady income and low risk, you may opt for a bond fund that invests in fixed-income securities.
If you are looking for a trendy and adventurous unit trust that can offer you high returns and high risk, you may go for an equity fund that invests in stocks.
There are many types of unit trusts available in the market, each with its own features, benefits, and drawbacks.
Some of the common types are:
- Money market funds – These are like basic T-shirts that are safe and reliable, but offer low returns. They invest in short-term debt instruments such as treasury bills, certificates of deposit, etc.
- Balanced funds – These are like jeans that are versatile and adaptable, but may not fit everyone. They invest in a mix of stocks and bonds to balance risk and return.
- Index funds – These are like knock-offs that mimic the style of popular brands, but at a lower cost. They invest in a basket of securities that track a specific market index such as the S&P 500, FTSE 100, etc.
- Sector funds – These are like niche products that cater to specific tastes and preferences, but may be risky or volatile. They invest in a particular sector or industry such as technology, healthcare, energy, etc.
- Global funds – These are like exotic products that offer exposure to different cultures and markets, but may be affected by currency fluctuations or political instability. They invest in securities from different countries or regions such as Europe, Asia, Africa, etc.
How to Choose Your Outfit
Choosing a good unit trust depends on your personal goals, risk tolerance, time horizon, and investment style. Here are some tips to help you:
- Know your size – Different unit trusts have different levels of risk and return, ranging from small to large. You should choose a unit trust that fits your size, which means how much risk you are willing and able to take. You can use online tools or consult a financial adviser.
- Know your occasion – Different unit trusts have different investment objectives and time frames, ranging from short-term to long-term. You should choose a unit trust that matches your occasion, which means how long you plan to invest for. Generally, the longer your occasion, the more risk you can afford to take, as you have more time to change your outfit if needed.
- Know your style – Different unit trusts have different investment strategies and styles, ranging from classic to trendy, from value to growth, from income to capital appreciation, etc. You should choose a unit trust that matches your style, which means how you prefer to invest your money. Generally, classic unit trusts track a market index and have lower fees, while trendy unit trusts try to beat the market and have higher fees.
- Compare different options – Once you have narrowed down your choices based on your size, occasion, and style, you should compare different unit trusts based on their performance, fees, ratings, reviews, etc. You should look for a unit trust that has a consistent track record of delivering good returns relative to its benchmark and peers, while charging reasonable fees and expenses.
These are some of the steps you can take to choose a good unit trust. However, you should also remember that past performance is not a guarantee of future results, and that unit trusts are subject to market risks and uncertainties. By investing in unit trusts, you can enjoy the benefits of diversification, professional management, convenience, and affordability.
However, you should also be aware of the risks involved, such as market fluctuations, fees and charges, liquidity issues, etc.
Finance can feel abstract, so let’s explain unit trusts using something more relatable and an ever present part of this blog: fashion.
👗💼 The Fashion Fund
In the stylish city of Trendopolis, fashion lovers were always chasing the next big investment piece. But buying a designer item solo was pricey and risky. That’s when a clever stylist named Tasha launched something new: The Fashion Fund.
👜 The Concept of a Unit Trust
Tasha said, “Instead of buying one item alone, why not pool your money and own a share of a whole wardrobe?”
This wardrobe wasn’t just any wardrobe-it was curated with designer staples, seasonal trends, and timeless accessories. Tasha called it a unit trust.
👠 How It Works
- Each person bought units, like shares in the wardrobe.
- Their money was pooled together.
- Tasha, the fund manager, used her fashion sense to buy a mix of pieces: some safe (classic trench coats), some bold (neon boots), and some trendy (limited-edition handbags).
- Everyone owned a slice of the whole wardrobe, instead of just one item.
🧥 The Benefits
- Diversification: Instead of betting on one fashion piece, members had exposure to many styles.
- Professional management: Tasha tracked trends and rotated pieces to keep the wardrobe valuable.
- Liquidity: If someone wanted out, they could sell their units and get their share of the wardrobe’s current value.
🧵 The Risks
Fashion trends change. If neon boots fall out of favor, the wardrobe’s value might dip. But thanks to Tasha’s smart choices, the fund stayed balanced.
🛍️ Unit trusts are like fashion funds: you pool money with others, get expert management, and own a slice of a diversified collection. Whether it’s clothes or investments, the goal is the same: style with stability.
💼 Can Unit Trusts Grow Enough for Retirement?
Yes, unit trusts can be a powerful tool for long-term goals like retirement. Think of them as your capsule wardrobe for wealth: curated, diversified, and designed to evolve with your lifestyle.
📈 What Growth Looks Like Over 10 Years
While returns vary by fund type and market conditions, here’s a general idea:
Example: R100,000 invested at 10% annually could grow to R259,374 over 10 years.
You don’t have to put in a lump sum such as R100,000. You could start small, using tools such as Easy Equities, which allow you to invest as little as R50-R100.
🛡️ Why It Works for Retirement
• Diversification: Your money is spread across shares, bonds, and other assets.
• Professional management: Fund managers adjust holdings to match market shifts.
• Accessibility: Start small, grow steadily.
• Liquidity: You can access your money if needed unlike locked retirement annuities.
• Tax efficiency: Some unit trusts minimize tax on growth and dividends
Therefore, before you buy any unit trust, you should do your research and compare different options to find the one that best suits your needs and goals.
Ensure that you regularly review your portfolio to ensure that it meets your changing needs and goals.
Happy investing!
