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What is a unit trust?

Feb. 29, 2024
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Understanding the basics of a unit trust and what you're invested in

 

Collective investment schemes (CIS) sounds very exclusive, but to the contrary, they are very inclusive. The first unit trust was launched on the 14th of June 1965 by Sage with a starting value of R600 000. Today, there are over 1700 unit trust funds to choose from with a total size exceeding R3,1 trillion by the end of 2021. 


 

Unit trusts are the largest investment vehicle utilised in South Africa, and most probably the world. The chances of you being invested in a unit trust is highly likely, it might be your pension fund or your money invested on some investment platform.


 

Let's delve a bit, to ensure you understand what you are invested in.  


 

How does a unit trust work? 

Collective investment schemes (CIS) pool many investors' money together and are managed by professional investment managers. These managers invest in asset classes such as stock, bonds, and other securities on behalf of all the investors. The total investment fund is divided into units. The number of units that you hold within the fund, represents your ownership of the total fund, and you are entitled to that proportion of income, dividends, and capital gains (or losses)

All Unit Trusts and some Exchange Traded Funds (ETFs) are examples of collective investment schemes. 


 

Regulation and rules of unit trusts

The Financial Sector Conduct Authority (FSCA) regulates collective investment schemes via the CISCA act. This act controls the administration and operation of collective investment schemes in South Africa. Every CIS must meet all the regulatory criteria to become registered and has to apply for this through the FSCA. This is how the FSCA regulates the collective investment schemes market to ensure investors are protected.


 

Association for savings and investments South Africa (ASISA) 

As part of ASISAs goal to promote transparency and disclosure, all funds are classified into a ASISA classification and the collective investment scheme must adhere to the rules of the classification. The aim of the classification is to establish a standard for every fund and categorise them per their main asset class of investment. The naming convention works as follows. The first part is where, this indicates the geographic exposure of the fund. The second part is followed by what, that indicates the main asset class the fund will be invested in. Knowing the classification of your fund tells the first part of the fund's story.

To view all the funds in South Africa and their rankings within their category, use this link


 

Difference between unit trust, stocks, and ETF? 

You will notice that ETFs have similarities with both unit trusts and stocks, let's look at some of the differences between each to better your understanding. 


 

Unit trusts

Explanation: The pooled money is managed by investment managers according to the managers' expectations of how they will invest each asset (investment mandate).

Trade: Unit trust funds trade through a management company (MANCO) or Linked Investment Service Provider (LISP) In English it means the fund is available for investing through certain investment platforms in S.A. These funds are not available for trade on the JSE.  

Pricing: Because there is no active price, all the instruments within the fund are priced at the end of the day. 

Diversification: It depends on the mandate of the fund. If it is a multi-asset high equity fund (refer to the ASISA section above) then it's a well-diversified portfolio aiming for growth. If it's a general equity fund then the fund is invested in equities only but will have many stocks making it well diversified. 


 

ETF

Explanation: investment managers will manage the investments to track a specific index such as the All-share index (ALSI) or All bond index ALBI. 

Trade: ETFs and stocks trade on the JSE.

Pricing: All instruments on the JSE have real-time pricing, meaning the price of the ETF fluctuates during the day as the market dynamics move.  

Diversification: As an ETF tracks an index, they have many securities that make up the index making for good diversification. ETF focuses on one asset class but is well diversified within the asset class.


 

Stocks

Explanation: Refers to individual shares of a company that is traded and involves one type of security.

Trade: Stocks and ETF trade on the JSE. 

Pricing: JSE stocks have real-time pricing, meaning the price of the stock fluctuates during the day as the market dynamics move. 

Diversification: The lowest form of diversification. As you are buying stock in one company, all your risks are in the hands of the company. As the saying goes, more risk, more return. Singular stocks can bring massive fortunes or wipe you out if the stock price goes to zero.


 

In summary: 

There are a vast array of investment options available. The retail investor might be overwhelmed. Ensure that you understand what you are investing in and make your investment risk meet the timeline of when you need your investment capital. If you are unsure and have questions, please message us on Twitter/Facebook or send us an email at info@finsesh.com. We would love to help. 


 

If you want to find out more about becoming financially independent, please see our free course. If you want a blueprint toward financial independence, you can enrol in our Stages to financial independence course.

Onward to Financial Independence 

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