Investing in Unit Trusts

A unit trust fund has an investment mandate, which is a legal contract that sets out the fund’s investment aims. The mandate will give you an idea of whether the fund is a low-, medium- or high-risk investment. Funds appoint trustees (usually a bank or financial institution not affiliated to the unit trust company or fund manager) to look after the cash, shares or bonds that your fund owns.
The appointment of trustees means that even if the unit trust management company goes under, your money will still be safe because it is held in a trust. In terms of the Collective Investment Schemes Control Act (Cisca), unit trust funds are not allowed to invest more than 10% in the shares of unlisted companies.

A unit trust fund is part of a well regulated industry and you have recourse if anyone tries to defraud you. Unit trusts are regulated by Cisca, which replaced the Unit Trust Control Act in 2002.
The Financial Services Board (FSB) regulates the unit trust industry and all unit trusts that are marketed in South Africa must be registered with the FSB.

When you invest in a unit trust, you have access to the expertise and services of investment professionals known as asset managers or fund managers, who specialise in managing investments. They use the pool of money to buy underlying investments, such as shares, bonds and cash or a combination of these assets - on either the local or foreign market, depending on the type of fund in which you invest.
Fund managers are more likely to make sound investment decisions and stock picks than you are, because they have the expertise and experience.

You can track the performance of your unit trust fund on a daily basis on investment websites or via the press. Personal Finance publishes a unit trust performance table every weekend in the Saturday newspaper.
The Personal Finance unit trust performance table publishes the return of your investment over one-, three- and five-year periods. It is a good idea to look at the performance history of a unit trust fund over the longer periods before you choose to invest in that fund.
To calculate the value of your investment, simply multiply the number of units you own by the unit price, or NAV.

Pooling your money with that of other investors who have similar investment goals allows you to own a diverse range of investments at a low cost.
Many individual investors do not have enough money to invest directly in the range of underlying assets that unit trusts offer you at a low cost.
Unit trusts also give you access to investments, such as bonds, that have high minimum investment amounts that may be beyond your reach.
The advantage of being diversified across a broader range of shares, bonds or other securities is that your investment risk is reduced. For example, if one share or market sector does not perform well, this may be mitigated by the strong performance of other shares or sectors in which the fund is invested.

There are no minimum investment periods when you invest in a unit trust, and you can cash in your unit trust investment at short notice.
You will be paid the value of the units on the day your request to disinvest is processed. This is usually the same day if you submit your request timeously, or on the next working day. The money is usually paid into your bank account within 24 hours of the units being sold.
Depending on the type of funds in which you invest, it is considered prudent to leave your money invested for about three to five years in order to recoup the investment costs and to ensure an appropriate return.

You can earn interest and/or dividends when you invest in a unit trust, depending on the type of fund in which you invest. Individual funds decide whether to declare these earnings monthly, quarterly or six-monthly.
You can choose to have the interest or dividends paid out to you or reinvested in the unit trust, which will increase the number of units you own.
You may be taxed on the interest you earn from your investment and you may also pay capital gains tax (CGT) on the gains you make when you sell your unit trust investment.
The tax you pay will depend on the applicable exemptions and on your tax bracket.
The CGT exemption for the 2009/10 tax year is R17 500. The exemption on interest income for the 2009/10 tax year is
R21 000 if you are under 65 years old and R30 000 if you are aged 65 and older.