UNIT TRUST

A unit trust is a scheme in which people with similar investment objectives can pool their funds together for investment in different securities managed by professional fund managers to whom the fund is entrusted.   It is designed for long-term investment because it capitalizes on using the power of compounding interest and hence, is not advisable for people seeking short-term gains.

The funds are invested in different asset portfolio as follows:

  • Cash or money market instruments which included treasury bills, commercial paper, deposits, and bills of exchange, among others.
  • Fixed Income or an investment in which the issuer is compelled to make scheduled fixed payments. A typical example is a bond, a debt security in which issuer is obligated to pay regular interest and repay the principal debt at its maturity.
  • Equity or the capital of a corporation in the form of common or preferred stock, paid-in capital, retained earnings or comprehensive Income. This may be from a local, regional or global company. 
  • Commodities or physical raw commodities such as gold, metal, oil or even agriculture invested through the use of futures contracts or exchange-traded products.

How it works?

A unit trust consultant or agent explains and recommends which among these aforementioned investment portfolio best fits the investment risk of potential investor. For instance, a conservative investor who wants a steady stream of income and a sensible protection of his capital may be recommended to put their investment in a bond fund.  Meanwhile a more aggressive investor who wants to maximize returns by taking higher degree of risk can be recommended to invest on foreign or emerging stock.  The investor then entrust funds to a fund manager who pool all funds from other unit trust investors. The investor signs a trust deed, which specifies investor’s rights and responsibilities of fund manager/ trustee. The fund manager manages and administers all fund operations while the investor simply waits for his returns.

Advantages

  • Unit trusts are designed for average income earners who don’t have large amounts of money to invest. In this way, people with small incomes are able to pool their funds together to invest in big assets.
  • In a unit trust, your funds are dispersed in different investment portfolios, in order to minimize risk.
  • Unit trusts can easily be sold. If you needed emergency money, you can simply ask your unit trust consultant to sell your investment, and you can get your cash within days.
  • It is easy and convenient for people to invest in Unit trusts.Investors are saved from the meticulous task of investing but simply wait for regular updates from their unit trust consultant about the performance of their investment portfolios.
  • Professional Fund Management – The Securities Commission (SC) regulates the unit trust industry for the protection of investors’ interests.  Authorised professional fund managers make investment decisions on behalf of investors.

Risk

In any form of investment, there is always a risk involved.  Therefore, returns cannot be guaranteed. While risks may be reduced through portfolio diversification and professional fund management, unit trusts are still subjected to related risks integral in the market.  For one, funds are very volatile.  It may go up or down.  Secondly, unit trusts are invested on capital gains which are not periodic and irregular.  Finally, entrusting your fund without knowing how it is managed involves inherent risk. You Unit Trust Scheme Consultant may prioritize their principals rather than their client investors, which calls for the importance of transparency and impartiality in unit trusts.