A guide to investing in unit trusts

Cape Town - Often the technical jargon involved in financial planning can overwhelm potential investors and scare them away from making choices which will safeguard their financial future.

To unpack the investment complexities, Alexander Forbes financial planner Siba Njoba has put unit trust investing into three different scenarios.

Thabiso and Thato each have a capital amount of R10 000 to invest:
 
- Thabiso wants to invest for at least three to five years;

- Thato wants to invest for at least 10 years.

Njoba said the starting point would be to identify the goal or objective of investing.

“You must consider a suitable investment vehicle to invest the funds considering the investor’s personal circumstances. These include their risk tolerance, investment time horizon, tax rate and need to access the funds. After this, an investment strategy can be put into place,” says Njoba.

Various investment vehicles are available to save voluntary money for the medium to long term.

These include the tax- free savings account, unit trust investment plan or an endowment investment plan. Njoba says the three investors would require different investment strategies put in place to meet their investment goals, matching their risk to their expected return.

“Once a suitable investment vehicle and investment strategy is identified the money can then be invested into a Unit Trust Portfolio,” says Njoba.

“A unit trust is comprised of a blend of asset classes such as equities, cash, bonds and listed property - think of it as a pizza made up of asset classes. The ‘units’ would then represent the allocation of the shares bought from each asset class - a piece of the pizza.”

Each fund manager is given a mandate in terms of managing the funds and generating returns.

There are a number of unit trust funds namely:

- Equity funds: - equities are your higher risk asset class. The money is invested in growth stocks in the equity market;

- Global funds: - offer offshore exposure;

- Fixed interest funds: - typical bond funds, where the money is invested in fixed deposits and bonds;

- Money market/cash funds: very liquid, low risk and are suitable for short term investments.

Diversification across different asset classes allows the investor to manage risk in the portfolio. Njoba says this was one of the major benefits of investing in a unit trust portfolio.

“Another benefit is that unit trusts are easy to liquidate – ensuring ease of access to your money,” he says.

“Thus, Thabiso and Thato can easily invest their R10 000 in unit trust funds through a financial planner or broker, the banks or an accredited financial services provider.”