Unit Trusts are an excellent way to accumulate wealth, by buying units through a fund manager at the prevailing selling price which is calculated daily.
Generally, a unit trust is an unincorporated mutual fund structure that pools money from investors to hold assets and provide a profit. This type of investment vehicle is set up under a trust deed where investors are the beneficiary under the trust(hence its name). This way, profits go straight to the individual unit owners and asset managers earn their management commissions. Thus, the success of a unit trust depends on the management expertise and experience to effectively manage the units. Common types of investments undertaken by unit trust properties are cash equivalents (money market instruments), securities (stocks and bonds), properties and mortgages.
Unit trust managers offer different types of unit trust products based on the risk appetite of the investor and period of investment. These different types of unit trusts are broadly categorized as:
- The Money Market Fund
- The Bond Fund
- The Equity Fund
- The Balanced Fund
- Other – REITs and Shariah Funds
These unit trusts, operate and function as follows:
The Money Market Fund
The money market fund holds assets that are considered cash equivalents with maturities of one year or less. Assets like treasury bills and bonds, deposits, commercial papers, certificates of deposit, short-lived mortgage and asset-backed securities and more fall into this category. It is the most conservative option of all, with low risk and high liquidity (easy access), offering stable income returns. The yields on money market instruments vary daily and fall between 6% to 9%.
The Bond Fund
The bond fund, also known as the fixed income fund, holds a portfolio of debt securities only. The fund invests mainly in debt securities issued by governments and corporates, and further defined by time period to maturity. The objective of the bond fund is to provide a regular income stream while still preserving capital.
Typically, a bond fund manager buys and sells bonds according to market conditions and rarely holds to maturity. This way, he can achieve an optimal mix of different bonds in the fund as defined by yield and time to maturity. This way, the fund runs with no maturity date for repayment of principal offering returns consistently. Though the principal amount may fluctuate from time to time, so will interest paid as the interest paid monthly reflects the mix of different bonds within the fund. Ultimately, bond funds offer a more efficient and easier investment option for investors.
Equity Fund
The equity fund is a pooled fund that concentrates its investments in the stocks market. It is a great fund for investors that are well-versed in investing but do not have large amounts of capital to invest. Managed by experienced managers, equity funds offer higher returns (compared to a money market or bond fund) targeting both local and international stocks. The Kenyan market has a wide array of equity unit trust, ranging from funds with higher risk, higher returns to funds with lower risk, lower returns.
Let’s take a look at the ICEA Equity Fund. It has a high-risk rating with an above-average reward profile. Since inception, the fund, holding about 77% stocks, 17% T-bonds, 5% deposits, 1% T-bills, has returned 49.2% on average with a -4.6% trailing 12-month yield.
Balanced Fund
A balanced fund combines both stocks, bonds and sometimes cash equivalents into a single investment portfolio. It is a great investment option for investors looking to get a mixture of safety, income and modest capital appreciation. Designed to be a hybrid of the above as it is a mix of high and low-risk investments in a relatively fixed mix of stocks, bonds and/or cash equivalents. The fund either reflects a moderate or high equity component, or conservative, or higher fixed-income component orientation. To make good returns, you’d have to invest in no less than three years so as to allow the fund to balance out.
Other Unit Trust Funds
There are some REITs and Shariah Funds that are structured as trusts. The REIT focuses on investing in real estate properties. It provides a small-time investor with an opportunity to participate in the property market. REITs make it possible to invest small amounts to gain exposure to a wide array of opportunities within the property market. On the other hand, the Shariah Funds seeks to invest in Shariah-compliant investments. These investments typically exclude companies involved in activities, products or services related to conventional banking, insurance, financial services, gambling, alcoholic beverages and non-halal food products.
What’s Next?
If you have no time to actively manage your investments, then delegate to an experienced professional asset manager. There are so many funds out there designed to cater to every type and characteristic available, to match the risk profile and investment objective that investors may have. Before investing in any unit trusts/funds, always ask for more information about the past performance of the fund. It is also important to let your asset manager know your investment objectives and also, be honest about your risk appetite. This, way you can a get a fund that best matches your characteristics.
Happy Investing!
Image credits: Top, by Kaboonpics via Pexels
Meanwhile, You can click on the following links to read more about financial planning:
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