South Africa Unit Trust Investment

Does it make sense?

Why a South Africa unit trust? The stock market has returned on average more than 19% (including dividend yield) a year over the past five years, even after the recent market volatility.

However, not all shares have yielded such performance, and few investors have enjoyed this return. Why? Poor share selection and lack of diversification.

The JSE alone has hundreds of listed stocks ranging from 1c more than R500.

Not only can selecting the right shares be daunting, but a good portfolio needs to be diversified across a number of sectors, regions and asset classes.

Creating such a portfolio can be incredibly expensive and difficult to implement.

The research involved in managing such a portfolio takes significant skills and time.

Unit trust investing can give you the advantage of gaining access to a well-diversified portfolio, as well as expert analysis and ongoing research. South Africa unit trust managers pool the money of many investors and can, depending on the fund’s mandate, invest in shares, cash, property and bonds, both locally and o ff s h o r e .

The entire investment portfolio is divided into units representing an interest in the overall portfolio.

Interest and dividends earned on the underlying investments are generally reinvested and additional units are purchased for the investor, although this can depend on the fund and on the investor’s preferences.

One problem investors may encounter is that there are even more South Africa unit trusts available than shares, making selecting the right unit trust just as daunting a task as selecting the correct share.

In order to select the most appropriate South Africa unit trust for yourself, you need to understand your financial plan. You also need to understand the concepts of asset allocation, diversification and the risk-return relationship.

This is where it is helpful to have access to an investment adviser or planner, who can help you select the appropriate unit trust based on your financial plan.

The right South Africa unit trust will provide you with the appropriate overall asset allocation, ensuring that you are exposed to the appropriate risk-return balance and are invested with reputable fund managers.

Due to the seemingly endless number of permutations involving the various asset classes, sectors, regions and company profiles, there are significant differences between the unit trusts available.

Fund fact sheets are regularly published by fund managers and are a great source of information, setting out mandate, objectives, track record and risk profile.

Some typical types of funds available are stable funds (having significant cash exposure and fairly low equity exposure), balanced funds (with a balance of equities and cash-type investments) and equity funds (comprising mainly equity and limited or no cash investments).

Unit trusts should be viewed as long-term investments and it is generally not recommended that investors are invested in stable funds for less than three years, or balanced funds for less than five years. Equity funds should be considered even longer-term investments, with an investment period of at least 10 years.

South Africa unit trusts are highly flexible and can be bought as a lump sum, or as a monthly accumulator.

While a lump sum investment in a unit trust may prove to be the most profitable over the medium to long term, there are a number of benefits of accumulating unit trusts on a monthly basis.

For those of us who find saving difficult, a debit order can prove most useful as the monthly contribution is taken from your bank account before you have had a chance to spend your salary.

Should you find yourself in a position that you need to skip a month’s investment due to an extraordinary expense, it is easy to stop the payment.

One could then make up the payment over the next month or two, or alternatively skip the month’s contribution altogether.

Of course, investors can increase or decrease their monthly contributions (subject to some minimum monthly amounts) in line with disposable income.

Another benefit of this type of monthly investment is rand cost average. When investing a lump sum, you purchase all your units at the ruling price at the time that the investment is made.

This can mean making your entire investment at the time of a spike in the market. Buying units monthly allows investors to move into the market over time and reduces the effect of market volatility.

Adding to the flexibility of unit trusts is the ease with which they can be liquidated. The units can be sold at any time, but it should be remembered that unit trusts are generally intended to be long-term investments.

Netto-Jonker CFP is founder of Netto Financial Services.She was Financial Planner of the Year in 2001