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Are unit trusts a good investment?

By Isabelle Coetzee

Without a background in finance, it may be difficult to decide where to invest your savings. Therefore, many South Africans choose to rely on a fund manager to make the right decisions for them.

Joining a unit trust is one way of entrusting your money to a specialist who will ensure you receive the best returns for your buck.

Justmoney had a look at how unit trusts work, whether passive investments perform as well as active investments, and whether historical performance is worth taking note of.

Tip: Start increasing your returns by joining a well-performing unit trust today.

How do unit trusts work?

According to Johan Esterhuizen, asset manager at Fedgroup, a unit trust is a portfolio of shares, bonds, and other asset classes, chosen and managed by professional fund managers.

“Investors’ funds are pooled, and the manager buys assets on behalf of the fund. The assets are split into equal units and sold to investors,” says Esterhuizen.

He explains that unit trusts are bought and sold directly from the management company or through an investment platform. They’re not listed on a securities exchange, and trading and pricing happen once a day.

Find out more about how unit trusts work by clicking here.

What are the advantages and disadvantages?

Considering the multitude of investment options out there, it’s important to take note of the advantages and disadvantages of each choice.

When it comes to unit trusts, Esterhuizen believes there are the following benefits:

  • There is diversification and this will lower risk.
  • Professional investment managers manage the funds.
  • You don’t have to be a professional investor and you can buy a range of individual securities.
  • You can access the stock exchange without the knowledge or experience of investing.
  • In the event of an emergency, you can access your savings in 48 hours.
  • Unit trusts are highly regulated, and investors can be confident that, while they’re subject to investment risks, they’re not likely to be victims of fraud.
  • There’s also a high level of transparency as legislation requires disclosure about costs and details of the underlying portfolio.

On the other hand, Esterhuizen explains that these investments must be purchased directly from the management company, which could be seen as a disadvantage.

Similarly, purchase pricing is not competitive, and this may be another disadvantage for investors.

What about taxes, dividends, and fees? 

According to Esterhuizen, unit trusts are tax-efficient, providing tax exemptions on interest income and there are capital gains tax exemptions.

“With a unit trust investment, you – the taxpayer – are the investor. This means that your individual tax rate would be used to calculate any tax,” says Esterhuizen.

“You can make use of your interest rebate and your annual capital gains tax exclusion if you are in a unit trust,” he adds.

Investments usually earn investors dividends or interest. Esterhuizen points out that this is either reinvested or paid out. Investors share in the gains of the unit trust, but also the losses.

Besides this, fund managers also need to be paid for their services. Their service fee includes the initial fee, an annual management fee, and an administration and custodian fees.

“The combination of these fees vary from fund to fund and investors should consider how the fees affect the returns of their unit trusts, so it’s important to weigh the fees up against performance,” says Esterhuizen.

The value of past performance

When selecting a unit trust, fund managers will demonstrate with graphs how their unit trust has performed in the past. But is this a good indication of future performance?

According to Jako De Jager, head of retail portfolio solutions at Momentum Investments, when it comes to investing, historical performance isn’t necessarily a good predictor of future outcomes or expected performance.

“The majority of investment funds are philosophically aligned to a specific investment strategy or style. That style may have been rewarded in the past but given changes in market structure and drivers of returns, there’s no guarantee that the same strategy will be rewarded over a specific time in the future,” says De Jager.

He adds that if the same style is rewarded, there’s also no guarantee that it would benefit by the same magnitude either.

Choose wisely when you select a unit trust. Fill in the following form to get a no-strings call-back from a financial adviser who can answer all your questions about unit trusts.

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