A unit Trust is an investment scheme that pools monies from different investors and invest the pooled monies into a certain investment products such as shares, bonds, deposits etc. by the licensed fund manager on behalf of the investors. Each individual who has invested in the unit fund receives units depending on the size and value of their investment. Each fund has a prospectus that clearly states the investment objectives of the fund and how and which investments the fund will invest in to achieve those objectives.
Depending on the investment products the fund invests in, unit trusts are divided into different categories.
- Money Market Fund– This is the most common type of unit trusts. It invests in short term low risk securities which have a fixed and secured rate of interest e.g. fixed deposits, T- bills etc. It is most suited for risk averse investors as the investments invested in are less risky. However it offers low returns and should be used as a savings tool for short-term goals.
- Fixed Income Fund– Invests in securities that give specific returns on specific dates i.e. treasury bills, bonds, cash deposits etc. This fund is suited for investors seeking regular income and have a low risk appetite.
- Equity Fund – Invests in listed equity. These funds are more risky and are best suited for investors who are looking for superior returns over a period of at least 3 years and have a high risk appetite.
- Balanced Fund– Balanced Funds invest in a diversified portfolio of shares, bonds and the money markets. These are best suited for investors looking for a diversified portfolio.
- Managed Fund – It pools the collective investments of employees from different companies with returns made available upon their retirement. A good example is an individual pension scheme.
Since you have no much work once you invest in a unit trust unlike investing in single assets, the most important thing is to ensure you invest in the right fund. Just like other investments, you need to know and understand where you are putting your money into. You need to read the fund’s prospectus carefully and ensure you understand the investment products the fund invests in and the risks involved before investing in a specific unit trust. Your goals, needs and constraints should align with the investing style of the fund you choose.
In addition, it is important to research on the fund you are giving your money to and know as much as you can on them. Have they been in any scandal? Management scandals, financial scandals? Can you redeem your units when you need your funds or does the fund have the right to determine when you can redeem your units? It is also important to look at the performance of the fund as your main purpose of investing with them is to earn a return. So how has the fund performed over at least the last 3 years? Is it in line with the return you are looking for? Also, what are the charges and fees charged and how does it affect your returns? Does a huge percent of your return go to fees and charges? Remember, the fund managers are out to make the most money out of you.
Lastly, ensure that you invest with only licensed fund managers so that you may have recourse incase anything happens. Also keep good records of your investments and review your statements regularly. At the end of the day, just because the fund is being managed by a professional, it doesn’t take the final responsibility from you. As I always say, no one will take good care of your money than yourself.
So for those new to the investing world, unit trusts can be a great way to start!
PS: None of the content in this blog is financial or investment advice. It’s for educational purposes only. Please do your own research and/or consult with a professional if you want advice customized to your specific situation.