This is an attractive way to invest on the stock exchange with little funds and little knowledge. Unit Trusts are a way of pooling many people’s funds used by fund managers to buy shares from many different companies. Put simply funds are pooled from several holders of surplus money so as to attain critical mass to buy an asset from the stock market. This enables people who ordinarily would not have been able to meet the threshold of stock brokers to gather their money together and invest under the guidance of a fund manager. The Fund is invested in numerous stocks according to a certain formula decided upon by the fund manager in order to meet certain criteria. It is therefore an indirect way of being diversified in your investments.
Due to the fact that funds are pooled from many investors fund managers normally require a minimum investment period of say 90 days, to unlock value from the deposit.
The fund manager picks the shares to buy and decides when to sell. Consequently the investor has no control on the shares purchased or the timing of the selling of the asset. This poses a concern for ethical investors as they may not be keen to invest in some counters and yet the fund manager may not have a problem with ethical issues.
When investing in Unit Trusts the investor needs to know:
- the investment philosophy of the fund manager as this has a material impact on the performance of the Unit Trust Funds,
- the fund manager as this person’s risk profile affects his investment and trading habit,
- the expenses you pay in terms of administrative charges and when they are paid. In Zimbabwe few fund managers will let you know upfront the actual charges that you incur as administrative charges. It is preferable to go for funds which are not front loaded. A front loaded fund like most of the ones in Zimbabwe are funds that will deduct the management fees and charges before the investment. This means a significant portion of your investment is deducted before investing and so does not participate in your wealth creation process.
- the goals of the fund. This is critical because it allows you to know that your goals and the fund goals align. For example you may be seeking to beat inflation with your investment while the Fund goal is to mimic or trail inflation.
Generic Unit Trust Products:
Money Market Fund – Funds are invested purely on the money market
Balanced Fund – Pooled funds are invested on both money and stock markets
Equity Fund- Investments are invested on stock market counters which offer high return given risk.
Personally I do not encourage especially in Zimbabwe investing in Unit Trusts. Kingdom popularized Unit Trust and made them readily available to the common person. However many people by not understanding the uniqueness of Unit Trust lots money instead of making money. My major challenge with these instruments is that you have absolutely no control over your investment and how it works. And yet prudent investors treasure control.
I would prefer that a number of people pool resources together and invest directly on the Stock Exchange through a stock broker. This reduces costs of the Asset manager and leave only they broker’s charges and at the same time allow for investor control.