Embarking on the investment journey can be bewildering amidst the multitude of options presented by banks and financial institutions. Among the array of choices, unit trusts emerge as an effective and popular investment vehicle for their convenience and ease of maintenance.
This article aims to demystify unit trusts, exploring their nature, functioning, and the pros and cons associated with investing in them. Additionally, a curated list of prominent unit trusts in South Africa, along with their features and contact details, is provided for investors’ convenience.
Understanding Unit Trusts
A unit trust operates as an investment portfolio managed as a Collective Investment Scheme. Investors purchase portions, known as ‘units,’ which represent a share of the underlying assets in the portfolio. The market price of these units reflects the current value of the underlying assets, divided by the total number of units issued by the trust. Ideal for those seeking to invest and save or generate additional income, unit trusts offer a professionally managed and diversified portfolio, albeit with a slightly higher risk.
Functioning of Unit Trusts
In a unit trust, investors pool their funds into a large fund managed by a professional fund manager. This manager invests the money based on agreed-upon terms and risk profiles. The governance of unit trusts falls under the Collective Investment Schemes Control Act, requiring the appointment of an independent trustee to ensure proper fund management. Investors may choose to reinvest interest and dividends earned, enhancing the overall portfolio capital.
Upon an investor’s death, unit trust investments are considered part of the estate, subject to Estate Duty rates.
Pros and Cons of Unit Trusts
- Taxation:
- Returns on unit trusts are taxed unless placed under a tax-free savings account.
- Various taxes, including on foreign dividends, income, rental income, dividend withholding tax, and capital gains tax, apply.
- Accessibility:
- Low entry rates, with some institutions requiring a minimum monthly contribution of around R200 to R300.
- Flexibility to access part or all of owned units upon request to the service provider.
- Variety:
- Thousands of unit trusts in SA, each catering to different investment preferences, risks, and objectives.
- Investors can align choices with their risk tolerance and financial goals.
- Costs:
- South Africa exhibits relatively high fees for unit trusts, with an average total expense ratio of 1.6% per annum.
- Additional platform fees and expert advice fees can further impact returns.
- Legality:
- Unit trusts operate based on the fund’s mandate within a legal framework established by the SA government to prevent fraudulent practices.
- Diversification and Exposure:
- Unit trusts provide instant diversification and access to the global market.
- Useful for navigating market fluctuations and gaining exposure to international assets.
- Management:
- Investors leverage the expertise of financial professionals to manage their funds.
- Fund managers’ investment styles vary, offering choices between aggressive and conservative approaches.
- Ease of Opening:
- Simplified processes, allowing investors to open accounts with chosen financial institutions and purchase units without the complexities of converting currency or managing offshore accounts.
Prominent Unit Trusts in South Africa
- Absa Unit Trust
- Features: Various investment options, minimum monthly investment of R200, initial lump sum investment of R200.
- Contact Details: Phone: 0860 111 456, Email: [email protected].
- Allan Gray Unit Trust
- Features: Diverse investment options, minimum of R500 monthly investment or a lump sum of R20,000.
- Contact Details: Phone: 0860 000 654, Email: [email protected].
- Coronation Unit Trust
- Features: Long-term growth plans, various investment options.
- Contact Details: Phone: 0800 22 11 77, Email: [email protected].
- FNB Unit Trust
- Features: Stress-tested investment strategies, minimum investment of R300 per month.
- Contact Details: Phone: 087 736 3555.
- Old Mutual Unit Trust
- Features: Online transaction and portfolio management, various unit trust options.
- Contact Details: Phone: 0860 234 234.
- Satrix Unit Trust
- Features: Wide variety of asset classes, annual fees.
- Contact Details: Email: [email protected], Phone: 010 020 2250.
- Sharenet Unit Trust
- Features: Affordable prices, full risk spectrum, no minimum contribution or lump sum requirement.
- Contact Details: Phone: +27 21 154 0001.
- Stanlib Unit Trust
- Features: Numerous core funds, various investment periods, minimum investment of R500.
- Contact Details: Phone: 0860 123 00, Email: [email protected].
How to Choose the Right Unit Trust
Consider factors such as investment timeframe, risk tolerance, portfolio diversification, and financial goals when selecting a unit trust. Understanding these aspects streamlines the decision-making process.
Final Thoughts
Unit trusts offer a convenient and diversified investment solution, providing exposure to global markets and professional fund management. Assess fund managers’ styles, check risk profiles, and always request an information sheet before committing. Make informed decisions to navigate the complex world of unit trusts with confidence.