Types of Unit Trusts

Author: Sharenet

Unit trusts are an accessible, flexible and straightforward investment, making them one of the easiest ways to grow wealth. You decide how much and how often to contribute to the investment through lump sum payments or regular debit orders. The next step is choosing the right type of fund that suits your needs.

Types of unit trusts

Unit trusts can be categorised according to their underlying assets and level of risk, which influences their potential returns. There is no such thing as a free lunch: to gain higher returns on your investment, you must be willing to take more risk.

Over the next few weeks, we will be covering each type of unit trust in more detail, but here is an overview to whet your appetite:

Income funds aim to provide investors with higher levels of income rather than capital growth. They mainly invest in low-risk, high-yielding assets such as fixed-term cash, bonds, and even certain property investments. Income unit trusts can pay out income every month, quarter or semi-annually depending on the fund’s characteristics. Investors generally choose to reinvest their distributions, which allows them to take advantage of the compound effect – generating earnings from their previous earnings and thus accelerating the growth of their capital. Albert Einstein once said that compound interest is the eighth wonder of the world.

Balanced funds combine asset classes (bonds, equity, property and offshore) in a proportion that gives the fund the desired risk and returns characteristics. These funds are often Regulation 28 compliant, meaning they can be used as an investment for retirement money. (Regulation 28 limits the extent to which retirement funds may invest in particular asset classes, to protect them from the effects of poorly diversified investment portfolios.) This type of fund is also the most common investment as it is moderate risk; the fund manager actively diversifies the portfolio and allocates capital to the asset class that has the most attractive return prospects given the associated investment risk.

General equity funds provide growth by investing in a spread of different shares across all sectors of the Johannesburg Stock Exchange. Equity unit trusts are usually riskier than other unit trusts, but also have the potential to deliver more attractive returns. The risk is that the performance of these funds could fluctuate from year to year, and gains are thus not guaranteed. It’s unlikely that you will ever get rich without taking some risk and these funds are an example of that principle.

Specialist equity funds are for the more advanced investor who believes that a certain sector or theme in the JSE All Share is going to do well. These funds usually invest in a specific sector (financials, industrials etc.) or according to an investment style (value or growth). Other notable specialist unit trusts include property unit trusts that only invest in property-related companies.

Global funds that are domiciled in South Africa (meaning the administration of the fund is in SA and investments in the unit trust are made in ZAR) buy assets on foreign stock exchanges like the London Stock Exchange and New York Stock Exchange. These funds are invested in assets that are priced in foreign currencies like Dollar, Euro, Sterling and Yen. Global funds generally have access to more industries and is an effective way to diversify a portfolio that already holds domestic investments.

Feeder funds [FF] are also in a sense global funds. A feeder fund is one of a number of funds that all put investment capital into an overarching master fund, which is managed by one fund manager who makes all the portfolio investments and does the trading. Feeder funds can be domiciled locally or abroad and can invest in a master fund that is domiciled in another country. Investors can invest ZAR into the feeder fund, which is then converted into a foreign currency (usually Dollar or Sterling) and transferred to the foreign domiciled fund.

Fund of funds [FoF] are unit trusts that invest in other Unit Trusts (as mentioned above). The manager of the FoF usually adds value by managing the asset allocation of the fund and picking top performing fund managers to include in the fund. By blending fund managers, the FoF can significantly reduce risk.

Conclusion

There are many types of unit trusts available for South African investors and they can cater to almost any need. Unit trusts can help you cover your day-to-day expenses with income or build long-term wealth.

To start investing in unit trusts, contact Sharenet’s fund team or your financial advisor today.

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