What Are Unit Trusts?

Unit trusts are a type of collective investment that pools funds from many investors who share the same financial goals. Unit trusts are medium to long term investment vehicles which focus on capital growth for investors. Because a unit trust is a longer-term investment, they are able to minimise the effect of short-term price fluctuation.

A unit trust deed constitutes a contractual agreement that governs the tripartite relationship of the scheme. The three parties include:

• The Fund manager – often referred to as the management company. The fund manager is responsible for the daily operations and the funds overall investment performance.
• The unit holder – or investors in the fund. The ownership of a unit trust fund is expressed in the form of a unit. A proportionate share of the fund is allocated to the investor based on the amount invested. Income distribution or fund returns are distributed biannually or annually depending on fund performance.
• The Trustee – appointed as the custodian for all fund assets, the trustee must ensure that the fund manager adheres to the provisions laid out in the deed

Unit trusts deliver diversification, liquidity and affordability in a professionally managed investment solution.

• Diversification: Unit trusts reduce the risk of investing directly in the stock market by spreading the risk between a group of shares which reduces market volatility and increases returns.
• Liquidity: you can quickly and easily convert your investment into cash.
• Affordability: compared to direct investment in securities, unit trust investments can be made in a lump sum or monthly instalments which make them an affordable investment tool.
• Professional management: funds are actively managed by a full-time professional fund manager with the resources and expertise to influence the investment performance.

Unit trusts work best over the long term. When deciding on unit trusts it is important to understand the nature of each fund and evaluate your appetite for risk. Funds can be selected to provide a regular income stream or capital growth, or a combination of the two. Appetite for risk can be divided into two main categories: Stock funds which are associated with higher risk or volatility but also higher growth potential and Fixed-income funds normally yield lower returns because of the lower risk and volatility.

Unit valuation is based on the Net Asset Value of the fund which is calculated at the close of business each day. The unit selling price is the net asset value plus service charges which will determine the number of units you receive when you invest.

When investing in unit trusts you can customise your portfolio by spreading your investment across several funds. Based on your goals, your portfolio can help manage risk and generate returns. Over time as your goals change you can adjust your portfolio by switching funds.