> Six steps to debt freedom

> Brighten their future

> Gold fever: here to stay?

> Nedbank goes green

> Evaluating performance

> Gold hits 18-month high

> Pay less estate duty

> Why lending will resume

> Positive platinum demand

> Breaking the habit

Today, 21 March 2010

› Lukewarm hospitality

› Finland worried about BEE

› Bullock's hubby says sorry

› Pope 'must apologise'

› ANCYL shreds protest

Yesterday, 20 March 2010

› Malema in 'danger' - ANC

› Zille cheers 'engagement'

› Zille set to swallow ID

› 'Eskom imported labourers'

› ANCYL shreds protest

When I travel around the country doing workshops I have a series of questions that I ask the delegates each time. Included in my list of questions is: Do you own unit trusts? About ten percent of the delegates say yes. However, when I ask them to explain what a unit trust is, I am met with blank stares. Would you agree to undergo an operation recommended by a doctor without knowing what it was for? I doubt it. So, why do we buy investments without finding out what the implications are?

The level of ignorance regarding the investment arena is unacceptably high. Few investors can explain the difference between a retirement annuity, a unit trust and an endowment policy. Yet they keep pouring in hard-earned cash without knowing if the investment is working, or if it is appropriate for their needs.

What is a unit trust?
Unit trusts have always been perceived and marketed as suitable investments for small investors with little knowledge of investment markets. In return for transparency, flexibility and good returns over time, investors have paid relatively high initial and annual fees. But the unit trust environment is changing, it is becoming more competitive and investors are being offered a greater choice of funds. These changes, as well as changes in pension fund legislation are causing investors who had previously neglected unit trusts to give them a second look.

The fundamental premise behind a unit trust fund is simple: a large group of investors pool their money in order to get a spread of professionally managed investments. The average investor does not usually have sufficient money to buy a spread of quality shares, and a range of shares is important to reduce risk. Unit trusts allow investors to own part of a diversified, blue-chip portfolio by investing a modest amount of money.

How does a unit trust work?
A unit trust pools the money of many people and invests it in shares, bonds, money instruments and other investments. This pool is then divided into identical units, each unit containing the same proportion of the assets in the fund. Funds set a minimum investment amount — investors can choose to invest a lump sum, or a monthly debit order. Lump sums typically start at R1000 and minimum monthly debit orders at R100 a month. Investors share in the fund’s gains, losses, income and expenses on a proportional basis.

Unit trust management companies are required to operate their investments within certain requirements or mandates, laid down by the Association of Unit Trusts (AUT) and the Financial Services Board (FSB). The primary purpose of these mandate requirements is to protect the investments of the unit trust holders.

Some features of unit trusts
Every type of investment has advantages and disadvantages, and unit trusts are no exception. Unit trusts have many advantages as investment vehicles, and this has led to their enormous popularity both here and overseas. But there have been many, far-reaching changes in the industry over the last five years and investors owe it to themselves to keep abreast of changes in legislation, products and company practice. Unit trusts should be viewed as medium (three to five years) to long term (five years plus) investment, and are useful vehicles for funding a child’s education, or as part of a retirement portfolio.

Investment safety
For the past thirty years, unit trusts have provided small investors with a way to participate in the stock and bond markets. The founding fathers of the unit trust industry were mindful of their primary obligation: the protection of small investors. And their groundwork has paid off as there have been no major scandals in the unit trust industry to date.

An impressive series of provisions to protect the investor have been implemented over the years — most of these relating to the activities of the management companies.

It is fairly common knowledge that few individuals ever get wealthy from saving in a bank account. Individuals who want to pursue higher long-term returns, but have limited knowledge of the investment markets would be well advised to consider unit trusts as part of their strategy. But be warned, not all unit trusts are equal, so the services of an independent financial advisor to guide you is recommended.