Unit trusts explained in plain English
A unit trust lets you invest alongside many other people in one professionally managed pool — here is how it works, what you actually own and what to check before you choose a fund.
Key points
- A unit trust pools the money of many investors and spreads it across a range of investments chosen by a professional manager.
- What you own is units — equal slices of the pool — and their price moves up and down with the value of what the fund holds.
- Funds range from money market funds to equity and global funds, and the type tells you more than the name on the label.
- Unit trusts are regulated and generally easy to get out of, but neither your capital nor your return is guaranteed.
How a unit trust works
A unit trust — formally, a collective investment scheme — is a way of investing together. Instead of buying shares, bonds or property on your own, you put your money into a fund alongside many other investors, and a professional manager invests the pool according to a stated objective, such as a steady income or long-term growth.
Pooling gives you a spread of investments that would be hard to build alone, hands the daily decisions to people who do this full time and shares the costs among everyone in the fund. It does not remove risk: a spread softens the effect of one investment doing badly, not of markets falling as a whole.
Units, unit prices and what you actually own
The pool is divided into equal portions called units. When you invest, your money buys units at the price of the day; when you withdraw, you sell units back to the fund. The fund creates units as money comes in and cancels them as money leaves, so you never need to find a buyer.
What you own when you buy units
Illustration- You and your units
- Other investors
- What the fund invests in
The unit price is worked out, usually every business day: the value of everything the fund holds, less the fund’s costs, divided by the number of units in issue. If the investments rise in value, so does the price; if they fall, it falls. Your investment is worth the units you hold multiplied by the current price.
Instructions are generally priced forward: you get the next price calculated after your instruction arrives, which nobody knows in advance. Income the fund earns is paid out at set intervals, and you can usually take it or reinvest it in more units.
The broad types of fund
Most unit trusts fall into a handful of broad types, classified by what they invest in and where. The type says more about how a fund is likely to behave than its name does.
- Money market funds. Hold short-term interest-bearing investments and are designed to keep capital steady while paying interest. They are not bank deposits, and a loss, while unusual, is possible.
- Income funds. Invest mainly in bonds and similar investments, aiming for more income than a money market fund with somewhat more movement in value.
- Multi-asset funds. Often called balanced funds, these mix shares, bonds, property and cash — from cautious versions to ones that hold mostly shares.
- Equity funds. Invest in company shares. They tend to move the most and are generally meant for long-term goals.
- Property funds. Invest mainly in listed property companies, which can be as changeable as shares.
- Global funds. Invest outside South Africa, which spreads your money across other economies and adds the effect of the rand’s movements.
No type is better than another; each is built for a different job. Our article on risk, time and your goals looks at matching one to the time you have.
How unit trusts are regulated
Unit trusts are governed by the Collective Investment Schemes Control Act and supervised by the Financial Sector Conduct Authority (FSCA). A few protections follow:
- The manager must be approved. Only a registered management company may offer a collective investment scheme to the public.
- The investments are held apart. A separate trustee or custodian holds the fund’s assets on behalf of investors, away from the manager’s own.
- Funds must stay spread. There are limits on how much may go into any one investment.
- Managers must disclose. Costs, holdings and past performance have to be published in a standard form.
Regulation covers how a fund is run and what it must disclose. It does not protect you from losses: the value of your units can fall as well as rise.
Reading a fund fact sheet
Every unit trust must publish a minimum disclosure document, usually called a fund fact sheet. It is short, free and the most useful thing to read before you invest. Look for:
- The objective and the fund type.What the fund is trying to do, and whether that matches your reason for investing.
- What it holds.The split between shares, bonds, property, cash and offshore investments, and the largest holdings.
- The risk indication and suggested term.How much movement to expect, and how long the manager suggests you stay invested.
- The costs.The total expense ratio and the transaction costs show what it has cost to run the fund; adviser and platform fees usually come on top, although some fund classes build part of them into the annual fee — so ask which class you are being shown.
- Past performance, in context.Compare it with the fund’s benchmark over longer periods, bad patches included — it is not a guide to the future.
Getting your money out, and what it costs
A unit trust held directly has no fixed term. You can generally sell units on any business day, with the proceeds typically paid out within a few working days. In exceptional market conditions a manager may be allowed to delay withdrawals, but this is rare.
Easy access does not make every fund suitable for short-term money: sell an equity fund after a market fall and you take the lower price with you. Selling or switching can also trigger capital gains tax, and the income a fund pays out is generally taxable too.
Costs come in layers: the manager’s annual fee, already reflected in the unit price; sometimes an initial or performance fee; an administration fee if you use an investment platform; and an adviser fee, agreed up front. We look at each layer in What investing really costs.
Good to know
The same unit trust can often be held on its own or inside another product, such as a tax-free savings account or a retirement annuity. The fund is the same; the rules on tax, access and limits come from the product around it.
Who unit trusts may suit
Unit trusts tend to work well for:
- People starting with modest amounts. Most funds accept a monthly debit order, a lump sum or both, with minimums set by each manager.
- Investors who want a spread without doing the research. One fund can hold a wide range of investments, watched by a full-time team.
- People with a clear goal. There is a fund type designed for most time frames.
They may be less suitable if you cannot afford any fall in your capital, or if watching the value move would push you to sell at the wrong time.
How VyroPlus helps
VyroPlus is an authorised Financial Services Provider based in Kimberley, and investments are one of the eight areas we help with. With unit trusts, the work is mostly matching a fund type to your goal. A conversation usually covers:
- what the money is for, when you will need it and how much movement in value you are comfortable with;
- which fund type is designed for that job, and how it fits with what you already have;
- the fact sheet, the costs and the tax treatment, explained in plain terms before you decide anything;
- whether a monthly debit order, a lump sum or both makes sense, and how reviews could work as your life changes.
There is no obligation, and no return is ever guaranteed. The aim is that you understand what you are choosing and why.
Questions to ask
Before you choose a unit trust, it helps to have answers to these:
- What is this money for, and when will I need it?The answer points to a fund type before it points to a fund.
- How much has its value moved in the past?Look at the worst periods too, and ask whether you would have stayed invested.
- What will it cost me in total?Ask for the fund’s costs plus any platform and adviser fees, in writing.
- How do I get my money out, and what might I owe in tax?How long a withdrawal takes, and whether selling could trigger capital gains tax.
Next step
Talk to us about investments
Send us a note through the contact form and we will arrange a time that suits you — in person in Kimberley or by phone.
