Investing in a unit trust offers investors numerous advantages, including:
a. Professional management at a low cost
b. Safety through the spreading of risk (diversification)
c. Liquidity - able to convert investment into cash at any time
d. Ease of transaction - I can help you invest!
e. Capital appreciation/income stream - let your money grow!
The operation of a unit trust may be best explained by outlining its similarities with the operation of a bank, with which most individuals are familiar.
Many individuals deposit money in the banks, for which they receive interest. These individuals expect complete liquidity where they must be able to withdraw their deposits in cash at any time. The banks employ professional managers to look after the deposits. The deposits are invested. These managers lend the deposits to other individuals requiring funds and a host of other profit generating facilities of the banks.
Similarly, unit trust holders wish to put their money to generate higher returns. The goal of all investments is to make money more productive, either through producing income or growth. Unit trust holders have liquidity because their units can be readily converted into cash at any time. By investing in unit trusts, it allows them to engage professional fund managers at a low cost to the individual investors. These managers diversify the investible funds in many different securities (shares in stock market) and other approved channels to spread the risk.
The unit trust is constituted through a document known as a deed (contract-like) which brings together and binds the various parties to the deed:
- The trustee (a third party company appointed by the unit trust company), who holds the assets of the trusts on behalf of the unit-holders.
- The manager (the unit trust company), who is the promoter of the scheme and provides investment and administrative expertise and markets units to the public
- The unit-holders (you as the investors) who provide the funds for investment and expect to receive the benefits derived from the investment. The effect of dividing the beneficiaries' interest in the trust into units is that their interest is quantified into discrete portions.
Particular advantages of unit trusts over the pooled investments include :
- The provision of an independent trustee to hold the trust's assets on behalf of unit-holders and to watch over their interests on an on-going basis.
- The deed and prospectus are scrutinised by government authorities, prior to an offer of units being made to the general public. The managers and trustee are themselves approved by the regulators.
- A buy back provision or covenant in each deed which requires the manager to redeem an investor's units within specified time limits at a price determined in accordance with the deed.
Provisions in the deed under which the manager and trustee are in a fiduciary position in relation to the trust (i.e. they can only profit in ways laid down under the deed). The investor can determine in advance what costs and charges they will be required to pay to join and stay in the trust.
Email me if you wish to invest or for more info: shpoh88@gmail.com
[This posting was first published on May 1, 2008]
3 comments:
Unit trusts sound good. How is it that some small towns in Sweden are getting burned because they "invested" in American subprime lending? How do we know where the Unit Trust is being invested and how safe it is?
That is where you haVE TO PURCHASE from someone professionally trained whom you know and can be trusted. Otherwise our money will go down the drain.of course the saying goes, hugh risk high return.it is a matter of leverage over time.
To answer rob, Unit Trust Companies issue Quaterly as well as Yearly Reports. In these reports, the investment profile of each fund is listed. Investors should be able to know where their funds are invested in.
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