Balanced funds
The main objective of the balance fund is to provide a regular income as well as capital appreciation 
in the medium to long term. These funds have investments in equity securities as well as fixed income securities. The allocation of funds to equity securities and fixed income securities are decided by the fund management company (FMC) depending on the market conditions. The risk of these funds is lower compared to the growth funds. Usually investors in these funds get an annual dividend and they could sell their investments and realize a capital gain when the unit prices move up.
Indexed funds
Indexed funds are funds that invest in a group of securities included in a particular price index. For example, there are 20 companies included in the S & P 20 Sri Lanka Index. An index fund can select this index and invest only in the 20 companies included in the index at the same proportion each company is represented in the index. The main objective of these funds is to replicate the performance of the selected index.
If we take the above example, say in a particular period the S & P 20 Sri Lanka Index recorded a growth of 10 percent. The indexed fund that invests in the companies included in the above index should also record a growth of 10 percent. These funds carry a very high risk as all investments are made in the equity securities. However, through these funds, an investor can have exposure to all the companies included within a particular index.
Sector-specific funds
These are funds which invest in companies coming under a specific sector. For example, if you have a banking sector fund, it will invest only in the shares of the companies under the banking sector. The main objective of these funds is to provide a higher return to the investors when a particular sector is expected to do well in different economic cycles. These funds also carry a very high risk as all investments are made in selected companies falling within a particular sector.
What is the role of SEC in a unit trust?
The Securities and Exchange Commission (SEC) is the licensing authority which grants licences to manage unit trusts. After the licence is granted, the FMC needs to submit various reports on the unit trusts to the SEC. From these reports, the SEC will be in a position to monitor the operation of the unit trusts. In addition, the SEC visits the FMC and the trustee to carry out on-site inspections in order to ensure that these institutions comply with all rules and regulations pertaining to unit trusts.
What are open-ended and close-ended funds?
These are two broad classifications of unit trusts. An open-ended fund is a unit trust fund where investors can enter and exit anytime. New investors can continually purchase units from the FMC and those who have already invested in the units can sell their units any time they want. As a result, there are no restrictions on the number of units that can be issued in an open-ended fund and the fund does not have a fixed maturity period. In these funds, the unit prices are calculated on a daily basis and the manager’s buying price and selling price are published in the daily newspapers or on the FMC’s website.
In a close-ended fund, the units are offered to the public during the initial offer period and subsequently no investor can purchase units from the FMC. These funds could be perpetual or have a fixed maturity period. In Sri Lanka, we have some close-ended funds with fixed maturity period and unlike an open-ended fund, no investor can sell his/her units whenever he/she wants. As these funds generally have a long maturity period, the FMCs usually provide an exit mechanism to the investors in these funds.
The most popular exit mechanism is to list the units of the close-ended funds in the Colombo Stock Exchange (CSE). Since there is no new issue of units and redemption of units taking place daily, the unit prices (net asset value (NAV) per unit) are not calculated on a daily basis but on a monthly basis. The NAV per unit is released to the CSE. The other exit mechanism could be permitting partial withdrawal of units periodically.
Different types of unit trust explained above can be either open-ended or close-ended. However, the majority of unit trust funds in Sri Lanka are open-ended funds.
How safe are the investments in unit trusts?
Other than the risks associated with the different types of funds, the presence of an independent trustee, who has the custody of all assets of the fund and who is ensuring that all investments are made in accordance with the objective the fund provides, adds safety to the investors. Regular supervision by the SEC ensuring that the FMC and the trustee carry out their respective functions in accordance with the rules and regulations applicable to the unit trusts make investments in unit trusts more secure.
How many FMCs are in business and how many unit trust funds are in operation?
There are 14 FMCs managing a total of more than 75 unit trust funds in Sri Lanka.
How can an investor invest in a unit trust?
If you visit the website: www.utasl.lk, the website of the Unit Trust Association of Sri Lanka, it will give all the names and contact details of the 14 FMCs. You can also see the latest performance of different types of unit trust funds in operation. If you click on any of the companies on this website, you will be taken to the website of the particular unit trust management company. You may be able to see the different types of unit trusts offered by this company and select a fund that suits your risk profile and return expectation.
These websites provide soft copies of the explanatory memorandum and you need to go through this document in order to understand the objective of the fund, risks inherent in the fund, fees and charges levied by the fund, people who are managing the fund, etc. If you are unable to understand anything and you require further assistance, you may call the relevant FMC and get more information about the fund.
Once you are convinced that you want to make an investment, you can request for an application form and a know your customer (KYC) form from the FMC (you may be able to download these documents from the company’s website). Submit the completed application form and KYC form together with a copy of the NIC and the cheque to the FMC. The FMC will process your investment and forward to you a unit certificate or a transaction receipt in due course. This will usually carry your name and address, the amount of investment and number of units allotted to you.
How do I know whether the value of my investment has gone up or down?
The unit prices are published in the daily newspapers as well as on the website of the FMC. The FMCs publish the buying and selling prices of all the unit trust funds managed by them. You can take the buying price of a unit of your investment and multiply by the number of units you hold, you will arrive at the current value of your investments. Compare this with the original investment and you will know whether the value of your investment has gone up or down.
How do I sell my units?
It is very simple. If it is an open-ended fund, you contact the FMC and inform them that you want to redeem your units. If the units are in the form of a certificate, the FMC may ask you to sign on the reverse of the certificate and return it to them or else a letter or an e-mail would be sufficient to redeem your units. Upon receipt of a redemption request, the FMC will inform the trustee of the request and the trustee will prepare an account payee only cheque in favour of yourself and send it to the FMC to be dispatched to you. Some FMCs do fund transfers directly to the bank account of the investor. In case of a close-ended fund, if it is listed on the CSE, you may be able to sell your units through a broker in the market.
Will I get any reports for my investment periodically?
Yes, the FMC will publish an interim financial statement and an annual report. The interim financial statements cover a period of six months and these are usually published in the newspapers or uploaded on the FMC’s website. The annual report of the unit trust fund is generally posted to the investor.
What are the real benefits of investing in unit trusts?
The benefits of investing in unit trusts can be many. The following are some of the key benefits of investing in unit trusts.
- Can start with a small amount
You do not need a large sum of money to invest in unit trusts. In some unit trust funds, you can start your investment with Rs.1,000.
- Professional fund management service
Your funds are managed by professional fund managers, who have the knowledge and the expertise to select the best investments available in the market. This gives an opportunity for ordinary investors to get the benefits of the capital market.
- Benefit of a diversified investment portfolio
When you invest in a unit trust, you are going to get the benefit of the entire investment portfolio of the unit trust. As the unit trust has a large pool of funds, they invest in different types of investments and within those investments they generally diversify their investment. For example, if you take the shares of the listed companies, they may select 15 to 25 companies and invest in the shares of those companies. As a small investor, you may not have sufficient funds to invest directly in 15 or 25 companies but through the unit trust you are in a position to get the benefit of the diversified investment portfolio.
The ability to redeem the units at any time provides the liquidity needed by the investors.
- Option to select a suitable fund
Investors have the option to select a suitable fund that meets their investment objective, risk profile and time horizon.
