A unit trust is a collective investment scheme in which investors’ contributions are pooled together to purchase a portfolio of financial securities, such as equities (shares), bonds, cash, bank deposits etc. The portfolio is managed by professional fund managers.
Types of Unit Trusts
- Equity Funds as the name suggests will provide access to the stock market.
- Money Market funds will provide access to money market securities such as treasury bills, bank deposits etc.
- Bond Funds or Fixed Income Funds will primarily provide access to bonds.
Unit trusts are regulated by the Capital Markets Authority to ensure that they are safe and that only registered professionals are involved with the affairs of the unit trusts.
Points to consider before investing in Unit Trusts?
- Amounts you are willing to invest, you can start with Ksh 1000
- Your time horizon for the investment
- Your financial goals – immediate, short, Medium and Long-term
- Liquidity- Whether you require regular income from the investment or purely looking for capital growth.
Benefits of investing in a unit trust?
- Diversity: Unit trust scheme spread the risks involved in investing because they invest in a variety of underlying assets. As an individual you would need a lot of money to buy even the smallest quantity of the many different shares offered by a unit trust fund. But, by investing a small amount in a unit trust, you are exposed to a wide range of investments.
- Professional fund management: You should choose investment managers who have successfully made investment decisions through a wide variety of market conditions over a long period.
- Investment amounts are not prohibitive: With unit trusts, a small sum allows you to invest in a well-diversified portfolio.
- Your investment is easily accessed: You can redeem your unit trust investments (convert them back into cash) whenever you need the money. There are no minimum investment periods, although the Association of Collective Investments recommends an investment horizon of between three and five years.
- Security of your funds: Unit trusts are well regulated through the Capital Markets Authority and controlled by the Collective investment Schemes Act which prohibits investment managers from taking certain risks. They also come with safeguards; each unit trust fund is compelled by law to appoint a trustee who looks after all the cash, shares or bonds that your fund owns. The trustee will usually be a bank or a strong financial institution. This means that if anything happens to the unit trust company or the asset manager your investment will not be affected.
- Access to the schemes investment mandate: Every fund has a mandate, a legal contract that sets out its investment aims and how it intends to invest to achieve these aims. A fund’s mandate gives you an indication of how risky the investment is. The trustee of the fund is responsible for ensuring that the asset manager adheres to the fund’s mandate.
- Transparent information and communication: Daily newspapers publish the prices of unit trust funds, and you can therefore always confirm the value of your investment. You need only multiply the number of units you own by the price published in the newspaper. It is mandatory for the scheme to issue monthly statements showing your investments position.
- Excellent Returns: History has shown that average returns from unit trust companies compare very favorably with returns from more traditional investment products. Unit trusts have also proved themselves as an excellent way of beating inflation. The longer you leave your money invested, the greater the opportunity for growth.
- Lump sum investments: A lump sum investment can be made at any time during the life of the investment, resulting in the entire investment benefiting from the growth and income potential of the chosen unit trust.
Following the opening of your account, you are able to top up your account with a minimum of Kshs. 1,000.
- Monthly Investment Plan: A regular monthly investment can be made into your account resulting in an easier way of building capital. A monthly investment has the benefit of shilling cost averaging, where additional investments can be made during times of market weakness.
- Switching: Investors are able to switch their investments between different portfolios depending on their changing needs and environment.
- Cash Withdrawal Facility: The Cash Withdrawal Facility allows you to take regular withdrawals from your unit trusts. The facility is useful if you are investing for a specific event in the near future where you will require a regular flow of cash -to pay for a wedding, school fees or to supplement a regular income. The Cash Withdrawal Facility is flexible, simple and tax-efficient.