A lot of people seem to think they have invested in Unit Trusts. In fact a lot of people think they have invested in the company that is managing the Unit Trust. A guest speaker I had at one of my classes helped us put this thinking into perspective recently.
What is a Unit Trust? A unit trust is a vehicle that is used to pool resources from different investors with the same objective.The Unit Trust itself per se is not the investment but provides access to different types of investments depending on what fund it is. The Unit Trust employs professionals called Fund Managers to make the everyday decisions regarding investments, in line with the specific objectives of that fund. There are different types of Unit Trusts that will then focus on investments in different areas. Equity Funds as the name suggests will provide access to the stock market. Money Market funds will provide access to money market securities such as treasury bills, bank deposits etc. Bond Funds or Fixed Income Funds will primarily provide access to bonds. To make this a bit more practical let’s put it in a scenario.
Mary approaches XYZ Investment Bank to invest Kes 20,000 in their Equity Fund. XYZ will take Mary’s money and combine it with other investors who have chosen to invest in this same fund. So let’s say the pooled funds amount to Kes 5 million. The Fund Manager at XYZ will then go and put this Kes 5 million in the stock market. They will invest in various companies based on their research and everyday make the buying or selling decisions. So what has Mary in fact invested in? A portfolio of companies on the stock exchange. Mary would not expect this portfolio to perform differently from the Stock Market. If the stock market is generally in decline, her investment value will decline. If the stock market is generally doing well, her investment value will rise. This is simply the avenue Mary has chosen to access stock market investments. She could have also chosen to go to stockbroker, select the shares she wants to buy and directly make the investment in those companies.
Her decision to go through a Unit Trust could be that she wants to diversify, which would very hard to do if she wanted to invest Kes 20,000 directly in the stock market. She may also want to leave the investment decisions in the hands of professionals. However with this type of investment, Mary will not be able to make the actual investment decision. She will not be able to tell the Fund Managers, which company she want to invest in. For that she would have to go as a direct investor in the stock market. So whether Unit Trusts are for you or not at the end of the day will really depend on how actively involved you want to be in the decision making process. I hear a lot of people blaming the fund management company for their losses. It is not necessarily the fault of the fund manager but the type of investment you choose by using the Unit Trust. Always ensure you know what the underlying investments are and then you can make a call whether to do it this way or just directly by yourself.
Waceke Nduati
www.centonomy.com | Twitter @centonomy.
Great insight especially to some of us who are studying in Investments Analysis, I am more able to understand the topic at hand. Bravo!
Thank you Jedidah,
It is good to know that you have benefited in your studies because of this topic. We wish you all the best in your studies.
Thankyou for the article. I have been searching for information about the same and have found your explanation usefull.
Very well said. This gives more insight in which path of investment is wisest to take in relation to Unit Trust investments.
Thankyou.
like the information you always give to the youths. keep it up
I find this very usefull .rhanks for the good work
Thank you for your insight. Could you say something about money markets?
Thanks! This explanation is the one I was looking for.