What is a unit trust and how do I invest?

“I’ve freed up R500 per month and would like to invest this amount every month in a unit trust account, but I don’t know anything about unit trusts, how they work or who to contact to do this,” writes Thami.

Maya replies: This is an excellent question because you want to understand what you are investing in. It is critical before you start investing your money that you understand the investment and what the risks are.

Typically a unit trust is invested in shares listed on the JSE, like SABMiller, MTN and Standard Bank, for example. These listed companies grow their businesses through profits each year, so their share prices increase and your investment grows.

Shares (equities) can be risky because returns from shares are not guaranteed and share prices can drop over the short-term. But over the long-term a well-managed company with good profits should produce good returns for investors.

Over the last 20 years, equities (shares) have outperformed cash by 7% a year on average.

That means that after 20 years your R500-a-month investment in equities would be worth R260 000 more than the same investment made into cash. That is R260 000 you do not have to work for.

Because shares can be volatile, it is not the place for short-term money or money you need to access quickly. You should rather consider a bank account or money market fund that provides good interest rates. However, for a R500-per-month investment for more than five years, equities should provide you with the best return.

Unit trusts
Most people do not want to worry about which shares to invest in, so they hand the money over to a fund manager whose job it is to research the shares and decide which will provide the best return over the next few years.

Unit trusts are the pooled resources of thousands of investors who have entrusted their money to a fund management company. The management company buys shares on the JSE on behalf of the investors. The trust does not give the shares to the investor, but combines them in a portfolio. The management then divides the portfolio into many equal “units”.

The investor receives a certain number of units for the money she has entrusted to the company that manages the unit trust — hence “unit trusts”. Unit trusts are also known as collective investment schemes. Click here for more details on unit trusts.

Exchange-traded funds
Exchange-traded funds (ETF) simply track an index of shares. They are not actively managed — in other words, there is no fund manager applying his or her expertise on what shares to purchase. An ETF just buys the shares in the index which may, for example, be the 40 largest companies on the JSE.

The benefit of an ETF is that the costs are lower, and many fund managers do not actually outperform the index so don’t deserve to be paid for their active management.

However, the benefit of a unit trust is that a good fund manager can enhance performance through good share selection and can also be more defensive when he or she is concerned about market volatility.

How to decide
There are more than 800 unit trusts, so the hardest part is deciding what unit trust to invest in or whether to invest in an ETF instead.

I suggest you read the article on how to decide between investing in a unit trust or exchange traded fund.

If you have at least a five-year time horizon, you could opt for a good quality equity unit trust (see the article) or an ETF like the Satrix Rafi (www.satrix.co.za).

The key, however, is to start investing. Even if you just select an average-performing fund, it is a lot better than sticking the money under a mattress.

How to invest
You can contact the companies directly either through their call centre or website and start a debit order. Most companies like Allan Gray, Investec and Coronation do not charge upfront fees if you invest directly, but some do so make sure you find out about the fees first.

Good advice is worth paying for, so if you decide to use a financial adviser there will be an advisory fee, so make sure he or she is adding value in terms of their advice.

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