Simply put, a unit trust fund is a way for you to invest your money. You can invest in a unit trust fund through financial services providers such as a broker; an Investment Management Company or in some cases through your bank.
A unit trust fund is a pooled resource, which means that it allows a group of investors to combine their cash and invest it. Think of it like going in on a group gift. Taken altogether, those investments are called the fund's assets.
So how does it work?
A unit trust fund is made up of equal shares which are called “units”; these “units” have a price called a Net Asset Value (NAV).
Take the following example: Invest R1 000 in a fund with an NAV of R118.74, and you will own 8.42 units. (R1 000/R118.74 = 8.42.)
While you as an individual invest in a unit trust fund, the fund itself is run by a fund manager, whose aim is to grow the overall value of unit trust fund. The fund manager does this by investing the fund's assets, usually by buying stocks, bonds, or a combination of these two securities which are listed on the Stock Exchange. (Some unit trust funds can buy more complicated security types.) These stocks or bonds are often referred to as a fund's "holdings" and all of a fund's holdings together are its "portfolio."
A fund's type depends on the kinds of securities it holds. For example, a small-company stock fund invests in the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.
For example, the Momentum Small/Mid Cap unit trusts’ three largest stock holdings are Life Healthcare (5.33% of its portfolio as of June 30, 2012), Pioneer Food Group (3.36%), and Spar Group (3.41%). A R1000 investment in that fund means that you own about R53.30 of Life Healthcare, R33.60 of Pioneer, and R34.10 of Spar.
What are the benefits?
- Don't demand large up-front investments; you can make a once off lump sum investment or you can choose to invest a small amount on a monthly basis
- Easy to buy and sell
- Well regulated
- Provide professional money management
What are the drawbacks?
- There are now more unit trusts in the world than there are stocks. Choosing a unit trust can be overwhelming when faced with so much choice
- Not all unit trusts are created equal
- Not all money managers are able to produce good returns for their investors
- Some unit trusts can charge too much money
- Unit trusts invest in a wide range of securities with different risk profiles
- Not as liquid as other types of investments. Unit trusts usually take at least a day to liquidate