What are unit trusts?

AS THE year draws to a close, most people will look back fondly or grimly over the last few months. For some, it was a year of great opportunities and for others it was full of regrets on missed opportunities.
Last week I had a very interesting chat with one of my prospective customers. After running him through different investment options, his eyes looked bewildered, a common reaction of course, at the options of unit trusts!
“Nick, why didn’t I know about this earlier!?” he retorted.
He reminded me of how many of us start the year with great investment goals but only to hit very low success rates. Many give up on their investment goals and blame it on anything or anyone they can see. For some, it’s all about procrastination, the “I will start tomorrow” or “let me think about it” kind.
The harsh reality though is that time waits for no one. As 2019 comes to a close, we will all look back and count the same 365 days of different investment opportunities. On a scale of 1-10, many of us will shy away to even rate ourselves on how much we have invested and the value we created for ourselves in 2019. Most of us grapple with fear of the unknown or the embarrassment of not having considerable sums to invest, and as a result we are paralysed to think of when? How? And where to start? This curls most of us into the category of the procrastinators and we easily find comfort in playing the blame game.
Therefore, in this series of articles, I will dwell so much on some of the investment options available through unit trusts and how to choose a suitable unit trust. First of all, what are unit trusts?
A unit trust is a type of investment that provides you with easy and affordable access to financial and capital markets. Unit trusts are usually medium- to long-term investment platforms. When you invest, you buy units in unit trusts of your choice and so these units belong to you until you decide to sell them.
With experienced investment managers working for you, your money is combined with that of other investors who have bought units in that unit trust and the pool of money will be used to buy securities such as money market and fixed income instruments, bonds, cash, property, shares or a combination of these on the local or foreign markets, depending on the type of unit trust. How much your investment grows depends on the performance of these assets. You can buy more units whenever you want to and you can leave the value of your units to grow.
Because of the underlying securities that the investment manager has invested in, your units start appreciating the moment you buy them and will accrue the value of the underlying assets in the portfolio. Hence, your value of investment will always show daily movements and you can track the growth of your investments easily.
It is worthy noting that unit trusts are not investments in insurance policies with an insurer and therefore cooling off periods do not apply. The fund/ investment manager does not provide any guarantee either with respect to the capital or the return on the invested funds.
Unit trusts have inbuilt safeguards. Firstly, they are regulated capital market products and the investment manager is a regulated corporate organisation. Unit trusts are constituted under the ambit of the Trust Deed, which outlines the legal powers of the fund/ investment manager, the trustee and the custodian. Trust Deeds can be inspected at no charge at the investment manager’s office.
The trustee is a corporate organisation different from the fund manager and authorised by the Securities Exchange Commission to oversee the unit trust. Essentially, he has the legal ownership of all assets under management by the fund manager. This means that if anything happens to the unit trust company or the investment manager, your investment will not be affected. Additionally, the trustee ensures that the investment manager adheres to the investment objectives of the unit trust.
The custodian is another governance arm of the unit trust. The custodian is similarly a corporate organisation, usually a financial institution or commercial bank not affiliated to the investment manager. They are responsible to keep in safe custody all securities on behalf of the trustee.
The fund/ investment manager has a mandate to create value for you as an investor. As a regulated and licensed person, he only invests in approved and regulated securities on your behalf. This offers you protection, and as part of the regular checks, you as an investor are at liberty to demand for key facts sheets that will show the profile and performance of each unit trust.
The foregoing essentially means that the key in making the most of your investment options is in choosing the right unit trust and the right investment manager.
In the next articles I will write about how to choose the right unit trust and ways in which unit trusts make money for you.
The author is a licensed investment advisor and current head of ABC Asset Management, a subsidiary of Atlasmara

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