Unit trust: An alternative method of investing in stock market?

23 June 2014 05:52 am

Many investors have shown great interest in investing in the Colombo Stock Exchange. However, there may be some investors who don’t have time to follow the market as well as their investment. Today’s article will suggest an alternative method of investment for such individuals. It is also seen as an ideal financial instrument for less sophisticated investors.

It is important to bear in mind that the article stipulates only basic yet vital information in order to give our readers a snapshot on this alternative method of investment. If you are interested you could visit the website of the Unit Trust Association of Sri Lanka (http://utasl.lk/) for further information on the industry.


What is a unit trust?
It is a collective investment scheme where money is collected from several people and these are pooled together and invested in different investment instruments.


Where does the unit trust invest our money?
The unit trusts will invest in different types of fixed income securities and listed shares of several companies.


Can you name the different types of fixed income securities?
They are government securities such as treasury bills, treasury bonds and repurchase agreements, fixed deposits, commercial papers, asset-backed securities, debentures, etc.


What is the return the investors can expect from unit trusts?
The return depends on the type of unit trust you have invested. If it’s an Income Fund, you can expect a regular dividend from your investments. If it’s an Equity Fund, you can expect a growth in your investments in the medium to long term.


What is the safety for my money?
In a unit trust, an independent trustee is appointed to take care of the investors’ assets. A financial institution such as a bank acts as the trustee for a unit trust.


Who manages our money and can we rely on them?
A fund management company run by investment professionals manage your money and their investment decisions are backed by strong research. All investments must comply with investment parameters specified in the Trust Deed and this is check by the independent trustee. Further, fund management companies are regulated by the Securities and Exchange Commission of Sri Lanka.


Are there different types of funds?
Yes, there are different types of funds to meet the different needs of the investors. They are Money Market Funds, Gilt Edged Funds, Income Funds, Balanced Funds, Growth Funds, Indexed Funds and Real Estate Investment Trusts, etc. Given below is description on each of these funds. Definitions are based on the description given in the website of the Unit Trust Association of Sri Lanka.


*Money Market Funds: Money Market Funds are funds which invest in short-term fixed income securities such as treasury bills, bank deposits, commercial papers, asset-backed securities and repurchase agreements. These funds are ideal for individuals to park their temporary cash surpluses and earn a competitive tax-free return. These funds generally provide liquidity similar to a savings account with a very attractive return. Investors can keep their investments even for a shorter period and earn a return. Investors in these funds are paid one or more dividends per year.

• Gilt-Edged Funds: Gilt-Edged Funds are funds which invest only in government securities. Treasury bills, treasury bonds and repurchase agreements on government securities are the only instruments in which these funds make their investments. The risk level on these funds remains very low and the returns on these funds are marginally lower than the rate on return on bank deposits. These funds are ideally suited for investors who do not want to take any risk on their investments. These funds regularly pay out a dividend either on a quarterly, semi-annual or annual basis.
  
   
• Income Funds: These funds invest in fixed income securities that provide a much higher return than the treasury bills and bank deposits. Major part of the investments of the funds is made in corporate debt securities yielding higher returns. These funds also make investments in Treasury bills, bank deposits and repurchase agreements. Investors in these funds get a regular dividend from the fund, either semi-annually or annually.
  
   
• Balanced Funds: Balanced Funds have an objective of providing the investors with a regular return and a capital appreciation in the medium to long term. The investments of the fund are made in equity securities and fixed income securities. The proportion of investments in equity securities and fixed income securities can vary depending on the market conditions and the investment strategies of the fund managers. These funds generally pay out a dividend once a year and investors can expect a capital appreciation in the unit prices in the medium to long term. These funds are ideally suited for investors who are seeking a regular return and who are willing to take a moderate risk for capital appreciation in the medium to long term. Usually these funds charge an entry fee when new investors enter the fund.
  
   
• Growth Funds: These funds have an objective of providing capital appreciation in the medium to long term. Major part of the investments of the fund is made in equity securities with a smaller portion of funds in fixed income securities. Here the fund manager will make investments in shares of the companies that are expected to grow their earnings in the medium to long term. Investors in these funds can expect a return higher than the rate of inflation in the medium to long term. Similarly, the risk level of these funds is higher than the Balanced Funds. These funds may not pay a regular dividend to the investors but the investors have the option of selling their units back to the fund management company if they feel that they are happy with the growth and they want to realize the capital appreciation.
  
   
• Indexed Funds: These funds will invest in equity securities in the same proportion of each security’s representation in a particular price index. The index can be S&P SL20, where the fund will invest in the 20 companies that are included in the S&P SL20 index according to the proportion each of these 20 companies represent in the index. The fund management company can select a group of stocks and create an index for these stocks and confine their investments to these stocks. The main objective of the fund is to replicate the performance of the selected index. For example, if we say that the S&P SL20 index has grown by 20 percent in a given period, the indexed fund that track the S&P SL20 should also grow by 20 percent during the same period. The risk level of these funds is marginally below the risk level of growth funds.
  
   
• Real Estate Investment Trusts: A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. They typically offer investors high yields, as well as a highly liquids of investing in real estate.

Are my investments risky?
Risk in an investment must be understood very clearly. The possibility of an actual return on an investment will be lower than the investor’s expectation is known as risk. All investments have some level of risk. For example, a Gilt Edged Fund may have a lower risk compared to a Growth Fund. Similarly the return from the Growth Fund can be much higher than the return from the Gilt Edged Fund.  


How do I know which fund is suitable for me?
You need to talk to one of the fund management companies and discuss with them your investment goal, the expected return, risk level, etc. and they will suggest a suitable fund that meets your requirement.


How do I begin my investment?
You need to fill up an application form, a KYC form (Know Your Client Form) and attach a copy of the NIC (National Identity Card) and a cheque for your investment. Those who do not have the facility to give a cheque can get the name of the bank and the account number from the fund management company and deposit the funds. They will create the units in your name and send you a Unit Certificate or a Transaction Receipt.


Can I check the value of my investments at any time?
Yes, you can. The unit prices are published on a daily basis in the newspapers. The companies publish their unit prices in their website daily.


Can I get my money back whenever I want?
Yes, you can. You may get in touch with the fund management company with whom you have made the investment and they will tell you the procedure to get your money back.


(Source: The Unit Trust Association of Sri Lanka)