Unit Trusts 101: A Guide to Investing for Beginners

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Unit Trusts 101: A Guide to Investing for Beginners

When you are new to the world of investing and you have some money that you are keeping at the bank, well you know that you shouldn’t keep that money at the bank because it’s losing value. You may want to invest that money to preserve its purchasing power and make it grow

You may have heard of unit trusts, such as my friend Francis. In today’s article, we will look at how to invest in unit trusts, but before we jump into that, let’s discuss why investing in unit trusts could be a viable option for you as a newbie to the world of investing. We will also take a closer look at how to invest in unit trusts, with a particular focus on Zambian unit trusts.

What is a Unit Trust?

A unit trust is a collection of a fund that has different investors who have contributed their cash into that fund, managed by a fund manager or an investment manager. The fund manager is responsible for creating a portfolio of investments, which could be investments in property, shares, bonds, the money market, and other investment vehicles or assets. The investment manager creates a portfolio of investments and chooses what they want to invest in or a combination of these assets. Then, the investor or the buyer of a unit buys a share of this portfolio. When you get your money and go and buy a unit, you are actually buying a share of this investment portfolio.

It’s very important from the onset to really understand a particular unit trust’s objective. Each portfolio has a different objective, so it’s essential to know what this particular portfolio is trying to achieve. If you’re new to the world of investing, it’s crucial to start with your life’s objectives. You probably have thought about your objectives already.

Many people want to save money to avoid losing its value, but it’s crucial to go further than that. You may have other reasons, such as saving for university fees for your child, building a house in the next five years, or retiring and wanting a regular source of income after retirement. These goals are crucial when considering what kind of investment vehicle to take. An investment is like a vehicle because it’s supposed to take you to your destination. So, your destination must be clear. You need to know where you’re heading and what your goal is because understanding where you’re going helps you choose the right vehicle.

Unit trust funds have different objectives. Some funds have short-term goals, while others have medium-term or long-term goals. With these goals comes the risk appetite or risk profile of the fund. It’s essential to match the investment vehicle to your goal. If you understand where you’re going, you’ll choose the right vehicle to get there. Just like in traveling, if you’re going to Chingola, you’ll decide if you should fly, drive or take a train based on your destination.

When you look at shorter-term investments, they are typically lower risk. Longer-term investments, on the other hand, carry a little more risk due to the loss in value of the purchasing power of money in the future, inflation, and other uncertain economic factors. Therefore, long-term investments carry larger risks.

When selecting an investment fund or unit trust, two things to look out for are your goal and your risk appetite. Match these to the fund manager’s portfolio. A fund manager is an individual, by the way, or a corporate organization managed by an experienced investment manager who makes the decisions on how or where to invest your money. Each fund has an objective. For instance, one fund or unit trust fund that I have come across in Zambia is the Equity Trust Fund, which is managed by ABC.

From my research, the Equity Trust Fund managed by ABC has done relatively well. So, I feel comfortable talking about it. I must have a disclaimer: this is not financial advice. If you need financial advice on any investment, please consult a registered financial advisor who should be registered with the Securities Exchange Commission of Zambia.

When starting the investment journey, there are a few things to consider as you invest in unit trusts. Let’s look at the key players when it comes to unit trusts. There are four key players that you need to be aware of.

  • The first one is you, the investorwho is buying the unit.
  • The second one is the fund manager, who selects specific investment assets to invest your money in.
  • The third one is the trustee, the custodian of the assets you are investing in, who is different from the fund manager.
  • Finally, we have the actual custodian, who holds the underlying securities of that trust fund. Therefore, it is essential to understand these key players and their roles when investing in unit trusts

Now, you need to know that investing in unit trust funds is regulated by the Securities Exchange Commission (SEC). All fund managers are registered with the SEC and you can find their names on the SEC website. So, visit the Securities Exchange Commission of Zambia’s website and you’ll be able to find a whole list of trust funds as well as investment managers.

Now, how much can you invest in a unit trust? Well, that all depends on the kind of fund you want to invest in and the options that are available on the market. From my research, different funds allow you to invest a lump sum amount while others have a minimum amount that you need to start with, and then you can make monthly contributions toward that fund.

It’s also important for you to know the price of the unit. Each unit has a specific price, and you can get that information from the trust fund’s website or by visiting their offices and asking for a prospectus that details the price, costs, expenses, and other things that I’m going to talk about later on.

However, when you’re starting to invest, it’s important to find out the price of the unit. Once you find out the price of the unit and whether that fund allows you to do a lump sum investment or monthly installments, you can then calculate how many units you are going to buy with a specific amount.

For instance, the Equity Investment Trust by ABC Banking allows you to make monthly installments of ZMW2000, and you can also do a lump sum of ZMW20,000 into that trust. If you decide to make monthly contributions of ZMW2000, you need to divide that by the price.

If you go to the ABC Banking Trust website, you are going to find the prices for all their unit trusts. If you look under the Equity Trust Fund, you will see that the price for September 9th was about ZMW1.60. Therefore, you can buy that trust unit at that price. If you are making monthly contributions, you can calculate the number of units you can buy with your contribution.

To start investing in a unit trust, you first need to determine how much you can invest and how much you can start with. For example, if you have ZMW2,000, you can divide that by 1.60 to get 1250 units. You can then increase your investment every month until you reach an amount that you are comfortable with.

There are two options for investing? You can start with a lump sum or do monthly installments. The best way to do monthly installments is through a direct debit from your account to the fund manager’s account. The fund manager can manage the investment by buying units for you or getting units in that fund.

To become a unit trust holder, you need to fill in an application form. Fund managers have application forms that include requirements such as proof of identity, proof of residency, and passport-size photos. You also need to state the fund you want to invest in, such as an Equity Fund, money market fund, bond fund, or property fund.

When you invest in unit trusts, you are delegating your investment to a fund manager who will manage your portfolio on your behalf. It comes with a cost, which is computed on what is referred to as a net asset value basis. The fund manager will charge you a fee for managing your portfolio.

There are generally three kinds of costs that you can expect when investing in a unit trust.

These are

  1. shared costs that go towards the asset value of the entire fund. The costs are based on the net asset value of that fund and are shared among the investors. It’s important to remember that this is a collective investment scheme, so you share the benefits, risks, and costs.

One advantage of investing in a unit trust is that you get access to the expertise of a professional investment advisor who has experience in choosing investments that will give you the desired return. However, there are three costs that you need to be aware of: administrative fees, regulatory fees, and management fees.

  1. Administrative fees have to do with holding annual general meetings, having the fund audited, and other administrative tasks. Regulatory fees are necessary to ensure that the fund is in compliance with the Securities Exchange Commission’s rules and regulations. Management fees are the fees paid to the fund manager for their services.

It’s important to consult your fund manager to find out the actual costs of each of these fees. For example, for the ABC trust, the administrative fee is around 0.8% of the net asset value of a specific fund. Understanding these costs is crucial as they can impact your return on investment.

If you have any questions about these costs or anything else related to investing in a unit trust, feel free to leave a comment in the comment section below.

How does a unit trust make you money?

 As an investor, you always need to ask yourself this question, and it should be at the top of your mind. When investing in a unit trust fund, it’s important to ask yourself, how does this investment make me money? There are generally two sources or ways in which you can make money when investing in a unit trust.

The first source of income you can receive from your investment in a unit trust depends on the kind of investment or assets that are in the Investment Portfolio, which is managed by your fund manager. The fund manager creates a portfolio of assets that could include equity shares, property, or a combination of these.

The income that you receive from your investment in a unit trust depends on the assets that make up the Investment Portfolio. For example, if the fund includes property, you will receive rental income, and if it’s an equity trust fund, you can expect to receive dividend income. If your investment is in a fixed-income instrument like a bond, you will receive regular coupon income.

It’s extremely important to understand what assets make up the Investment Portfolio because the type of assets in the portfolio results in the type of income you can expect to receive and how frequent it will be.

The first type of money that you can make by investing in a unit trust is Income, which is normally netted off by withholding tax and handling fees. It’s important to know what the withholding tax charge is on the type of income and what the withholding tax percentage is on dividends, bonds, or shares.

By understanding the withholding tax and handling fees, you can calculate the net income you can expect to receive. If you decide not to receive that income regularly, you could choose to reinvest it in the unit trust by buying more units. Reinvesting your income can increase the value of your investment over time.

In this case, the money being reinvested will be used to buy more units at the existing unit price.

The second way to make money from unit trusts is through capital appreciation. Capital appreciation occurs when an asset is purchased for a price lower than its current value. If the price of your investment or unit goes up, it means that there is capital appreciation, and the value of your investment has gone up.

For example, if a trust fund is invested in property, and the expectation is that property prices will increase, it means that there will be an appreciation in the value of the property. As a result, there will be capital growth on the investment in the trust fund that is invested in property. Similarly, in the case of shares, if there is an increase in the share price, it means that there is capital growth in the equity investment in that share.

The other way to make money from unit trusts is through capital appreciation. However, it is also important to note that you could lose money if the value of the property or share price goes down. It is crucial to consider both sides and understand that you could lose capital if the price of the shares or properties decreases instead of going up.

These are the two major ways to make money by investing in unit trusts. Finally, it is possible to sell your investment in the unit trust. When you decide to redeem your units, you can sell them back to the fund or company from where you bought them. You can approach your fund manager and tell them that you want to sell your units, and they will help you sell them at their existing market price

One more thing that I forgot to address is what affects the prices of the units. How are these prices determined? It’s a very important question for you to consider, and I would like you to do further research by asking whichever fund, or trust fund you want to invest in.

The prices for units are determined by the nature of the asset. So, if it’s a share, it’s the share price that will determine the price of that unit that you are investing in. If it’s a bond, it’s the prices for the bond that are going to determine the price for the units that comprise that investment. If it’s a property, it’s the price of whatever property is on the market. So, the prices of units also go back to what kind of asset investment it is. Of course, other factors are also considered, so go back to your fund manager to find out further information in terms of the pricing of the unit.

Insight Partners Africa— aims to bring you actionable insights from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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