What is a unit trust?

If you are interested in opening a unit trust account, but not really sure what they are, then you have come to the right place. This guide will look at what unit trusts are, how they work, and how they will diversify your investment portfolio.

What is a unit trust? 

Whether you are new to the investment world, or a seasoned saver, then unit trusts are a great way to save your money, and watch it grow.

But, what is a unit trust? Unit trusts are basically a collective investment scheme, where a number of people put their money together in the fund that then buys and sells shares on their behalf.

These funds are managed by a professional fund manager.
“Unit Trusts reduces the risk of an individual investing in the stock market and allows a qualified, skilled, experienced portfolio manager to do this on their behalf,” said an Absa spokesperson.

Unit trusts can invest in different markets and market sectors, or they can invest across markets. There are also different unit trusts based on your risk appetite.

A risk appetite is how much risk you are willing to take with your money. Are you the kind of person who wants to win big, but with higher risk of losing your money? Or to play it safe, with the returns maybe not as high?

You can take a simple risk appetite quiz here, to head you off in the right direction.

Types of investors 

The amount of time you leave your money in a unit trust, and what type of trust you choose, all depend on what type of investor you are, and what your needs are.

“Depending on your investment horizon or term and risk, if it is short term and low risk, and you [are] looking for income or a parking bay for short term funds then anything between three to 12 months. If your investment term is longer and you want to be exposed to higher risk, then the recommended term is three to five years, or more,” said Absa.

As with any savings, the longer you leave your money, the more compound interest can work.

Compound interest is letting your interest grow on your interest, and so on.

 “There’s no reason or excuse not to use the power of compound interest to benefit your savings strategy,” said Danelle van Heerde, Head of Advice Process and Tools at Sanlam.

Different types of unit trusts 

According to Investec Asset Management, there are six different types of unit trust funds: equity funds, fixed interest funds, income funds, money market funds, asset allocation funds, and global funds. 

Equity funds grow capital by investing in the broader stock market, such as with the JSE Top 100, or the Inda 25. These funds can also invest in certain equity sectors such as resources, financial and industrial funds.

Fixed Interest unit trusts, or also called bonds, “invest in a variety of interest-bearing assets such as bonds and fixed deposits,” explained Investec. These are also the same as income funds.

Money market funds, are also known as cash funds. These are great for short-term investments, as they allow you to ‘park’ your money in a safe place. Most banks have money market funds, or even investment accounts which work the same. They are also good for someone with a low risk appetite. But, they normally do not bring back the big returns.

Asset allocation funds - also known as balanced or managed funds – is when a fund manager invests in a spread of assets such as equities, bonds and cash depending on the conditions of the market.

Global funds are unit trusts that are exposed to international markets. Such as the London Stock Exchange (LSE), or even international companies which are not listed in South Africa.

 Products available

If you are interested in opening a unit trust, or speaking to a financial advisor about them, then the banks, plus other investment houses all have products available.

But make sure to look around for the best product to suit your needs. Below four banks, plus two investment houses unit trust pages are listed. There are, however, lots of other places you can go.

For Nedbank unit trusts, click here.

For Absa unit trusts, click here.

For Standard Bank unit trusts, click here.

For Old Mutual unit trusts, click here.

For Investec unit trusts, click here.