Are unit investment trusts a good fit in your portfolio?

In the past century, the financial industry has seen many major changes. The competitiveness of the industry has seen the launch of many innovative financial products such as Exchange Traded Funds (ETFs), Mutual Funds, and other complex derivatives among others. One of the oldest products, that has stood the test of time is unit trusts. This article will explore the field of unit trusts and how you can use it to grow your funds for the long term.

What is a unit trust?

Assume that you want to invest in a basket of American companies and you have just $1000. To do this, you will need to allocate this money to hundreds of companies. While this is possible, the number of shares you will own is relatively limited or diluted.

Another option you have is to buy an ETF or an index fund for the technology industry. An ETF is a publicly-traded fund that is made up of a number of differently-weighted companies. An index is similar to ETFs only that it tracks their movements. For example, the Nasdaq index tracks the performance of the biggest technology companies while the Dow Jones Industrial Average tracks 30 large companies that act as an indicator for the American economy. You can also invest your money in a mutual fund.

Unit Investment Trusts are similar to mutual funds. They are simply financial products where people and companies pull together their resources to invest in a number of financial instruments. By pooling these resources together, they are able to have significant holdings across the financial market. As the name suggests, unit investment trusts are made of two parts. The unit investment means that when you invest in them, you get units. For example, as a unit trust holder with $1000, it means that you hold 1000 units in the fund.

Trust, on the other hand, refers to a fiduciary agreement where one party – known as the trustor – gives another party – known as the trustee – the right to hold the assets for the benefit of the third party. The third party is known as the beneficiary.

Therefore, when the funds are pooled together, an experienced professional is given the work of investing it. Often, the fund manager is from a large institution such as Prudential, City of London, Witan Trust, and Old Mutual among others.

Who are unit trusts best for?

As mentioned above, there are many types of investment products available in the market today. There are individual stocks, bonds, commodities, and indices. Each of these products has its risk and opportunities. As such, they are intended for different audiences. Unit trusts are mostly useful for:

  • People with limited resources: a unit investment trust doesn't need a lot of money to begin with. While the amount of the starting capital differs from one company to another, you can find unit trusts that require as little as $500 to get started.

  • Longer term view: Unit investment trusts belong in a category in finance known as passive investing. Here, the money is not actively managed by the manager. Instead, they take a long-term view and allocate capital as needed. Therefore, you should invest in unit trusts if you want to hold your units for a longer period.

  • People with little time to invest: if you have some disposable income and you don’t have time to analyze investments, then a unit trust is an ideal investment product for you. This is because you are pooling resources with other people or companies and handing it to a professional manager.

  • People with little knowledge and expertise: if you are not an experienced investor or trader, an investment trust is ideal for you.

  • Impulsive buyers: impulse buyers are people who tend to buy things they have not planned for. If you are one, a unit trust is good for you because it is a bit difficult to access your money.

Types of unit trusts

There are a number of types of these funds. They are:

  • Equity fund: this is a type of unit trust that invests in equities. Equities are shares of companies that are publicly listed. This is the most popular type of unit trust because it exposes the investors to the thousands of publicly listed companies. While equities tend to be volatile, they are also known to yield more returns to investors. Equity trusts can be classified according to their industry and geography. While most unit trusts offer a diversified exposure to companies across the industry, others are industry-specific. Geographically, some unit trusts focus on different areas such as global, emerging markets, United States, Europe, or Asia.

  • Balanced fund: a balanced fund is one that is balanced between equities and bonds. A bond is a money that is given to companies, countries, and municipalities to fund investment. They are similar to debt, only that bonds have more participants. In a balanced fund, you benefit from the exposure of the bonds and the equities. A common strategy is to have a portfolio that has 60% equities and 40% bonds. There are others who advocate for an 80:20 ratio. It is also known as a hybrid fund.

  • Bond fund: as the name suggests, this is a fund that invests primarily in bonds. Some unit trusts focus mostly on municipal bonds while others focus on treasuries or corporate bonds. Municipal bonds are issued by municipal councils and cities while government bonds are issued by the national or federal government. Corporate bond, on the other hand, is issued by companies. These bonds are further classified according to their risk. Safe bonds such as those issued by a country like Norway have a smaller yield compared to those offered by fragile Puerto Rico territory. Corporate bonds are also classified into senior bonds, senior secured, senior unsecured, subordinated, investment grade bonds, and convertible bonds.

  • Money market fund: this is a type of unit trust that invests in short-term low risk financial instruments. Some of the instruments these instruments are: commercial paper and treasury bills. A commercial paper is a short-term debt issued by a company. It is mostly used to fund receivables and inventories. Some companies also use commercial paper for payroll purposes. A treasury bill is similar to a treasury bond only that it has a short maturity time which is usually one year.

  • ETF funds: this is a unit trust that invests in unit trusts. An ETF is a fund made up of many companies that is listed in an exchange.

Other types of unit trusts are those that invest in index funds, sharia compliant funds, and real estate investment trusts (REITS).

Why invest in unit trusts?

There are a number of reasons why you might consider investing in a unit trust. These are:

  • Diversification: unit trusts give you an opportunity to invest in a wide variety of financial securities at once. As mentioned, an equity fund allows you to invest in multiple companies and so on. Therefore, even if you are a day trader, setting aside money in other types of investments will help you diversify your earnings.

  • Low costs: most unit trust providers charge a small amount of money for unit trusts. This is unlike other money managers who charge as high as a 20% incentive fee and additional administrative charges.

  • Tax incentives: many companies offer tax incentives to people who invest in unit trusts. They do this as a way of encouraging more people to save for retirement.

  • Easy to withdraw funds: unlike other investment funds that lock away your money for a long time, most unit trusts offer an easy way of withdrawing your funds. After requesting to withdraw, it takes less than three days before the funds hit your account.

  • Low starting capital: to invest in a unit trust, you don’t need a lot of money. In fact, it is possible to get started with as little as $500 or less. It is also possible to top up the funds at any time.

  • Tracking returns: you can track the returns of your unit trust through the company’s website, newspapers, and other websites.

  • Global investments: using unit trusts, it is possible for you to invest globally. This is especially the case for companies that offer global investments.

  • Access to professionals: unit trust managers are often experienced people with a long track record of success. In fact, most companies give you access to the past performance of the main money manager.

  • Compounding: unit trusts are excellent because of compounding. This means that the interest gained from the investment is reinvested in the fund.

When searching for a unit trust, it is important to ensure that the trust provider is credible. It is recommended that you go for large companies that are public. It is also important to compare the historical performance of the money manager. However, remember that past performance is usually not an indicator of future performance. Further, you should attend the annual meetings that are mandated by law in most jurisdictions. Finally, while it is possible to withdraw your unit trust funds, you should limit doing so as it will minimize the impact of compounding growth.