Unit trust products are still the preferred method of investing for many local investors, with the industry attracting a record net capital inflow of R96bn.
This has resulted in the number of unit trust products available in South Africa jumping from 550 in 2005 to more than 900 in 2010.
According to Nick Brummer, director of investonline.co.za, while the proliferation of new funds provides investors with a bigger range of options, it also makes it increasingly difficult to select the right funds for your portfolio. He adds that as many of these new entrants have untested investment processes or limited experience, investors need to be vigilant when choosing a fund to invest their hard earned savings in.
"Selecting the right unit trust is crucial in obtaining good long-term returns over time. Some unit trust managers have a competitive advantage over others, so it is vital that you choose the right fund to suit your specific investment needs."
He says key to making this selection is good, independent, financial advice. "Although the FAIS Act stipulates that independent advice is a requirement, in practice this isn't always the case. Some investors have been steered into associated institutions by their advisors, thus bringing into question the issue of best advice and independence."
Equally important to the impartiality of the advice, says Brummer, is the question of fees.
"Investors must make sure they are aware of the different layers of fees involved with various funds as these can also vary greatly. "Some unit trusts charge high upfront fees in addition to platform, annual and fund manager fees. Once all these are taken into account, this can considerably deplete your return on investment over the long term."
Brummer says one of the key benefits of investing via an online platform is the much cheaper cost structure. "investonline.co.za has no upfront fees and charges a nominal 0.5% admin see annually, which adds to substantially higher net returns over a longer period."
Brummer says that if managed correctly, unit trusts are still the best vehicle for long-term savings for investors, as they provide direct access to equity markets with dedicated professionals investing for you. "Equity markets have shown impressive results over the last five years. The top two performing funds have achieved 211% and 180% respectively over the last five years, which has helped to boost investor confidence in domestic markets.
"This strong performance over the last five years helps to explain why unit trusts have gained so much in popularity. Even over the last year, when there were huge levels of volatility in the stock market, unit trusts have continued to deliver strong returns with top performers delivering a return of as much as 70%."