Sarah Bullen
Selling unit trusts and selling chocolate differs only in the product. In both instances there is a product and a company that will make money when the product is purchased. In both instances the product is aggressively marketed to the consumer.
And in both instances, buying the product will give the consumer a degree of joy. The difference, of course, is that a unit trust is a financial instrument that holds your money and hopes to make it grow, rather than giving you a quick sugar boost.
Just as chocolates differ in packaging and sizes – from 10kg blocks to bite-sized snacks or Easter eggs, from Godiva to cooking chocolate – so too do unit trusts differ in the investments they offer you. Each unit trust management company offers its own recipe to make your money grow – gilt funds, money market funds, high growth funds, emerging market funds, flexible funds, gold funds, aggressive funds, fund of funds … And so the list goes on, offering you a choice ranging from a very low-risk investment to high-risk unit trusts.
In buying a unit, an investor is pooling money with other individual investors, institutions and pension funds, in a fund with a specific investment objective.
The fact that the money is pooled increases the buying power and allows the fund manager to spread the investment out between offshore, local, equities, bonds, money markets, property and other investment instruments that a small investor looking to invest R500 a month would not be able to afford.
The price of the unit depends on the market value of the shares in which the pool of money is invested, and is calculated daily. The goal is for the value of the units to grow over time so that your money grows faster than if you deposit it in a bank account.
The first step in buying unit trusts is to decide which of the products suits your investment needs. There is no right answer. It is a choice of how much you want to invest each month, how long you are prepared to leave your money invested and which management company catches your eye.
There are hundreds of options available and a broker can advise on the one that suits both your investment needs and your desire to take a risk with your hard-earned cash.
The Association of Unit Trusts (AUT) classifies regulated unit trusts in five sectors:
l Equity funds – a fund in which the bulk of its investments are in the stock market. These can break down into funds targetting sectors – technology, financial, consumer, gold – or can spread across sectors and markets.
l Fund of funds – these are unit trusts which invest only in other unit trusts, with a maximum of 20% of their value in any one fund.
l Managed funds – these are more flexible than equity funds and allow the fund managers to shift the investments between the stock, capital, money and property markets.
l Fixed interest funds – only invest in interest-bearing assets.
l Money market funds – these have the lowest entry levels for investment and only invest in money market instruments which have a maximum maturity of 90 days. The risk profile is very low.
Funds are also classified domestic, worldwide, foreign or regional, depending on where the fund is invested.
Information on each fund is readily available from management companies – and often accompanied by strong-arm sales talk more fitting timeshare sales.
If you wish to avoid personal contact with a telesales operator or sales consultant, most information can be readily found online and can be read at your leisure.
AUT director Colin Woodin explains that, after having identified the unit trust you wish to buy, the next step is to fill in an application form. Woodin suggests that you follow some old, but prudent, advice and read the form carefully. It is not simply a form to fill in banking and address details but is a contract that should also explain all the processes and costs that you will incur, he said.
You will have to make an initial choice of whether to invest a lump sum – with the option of topping it up periodically – or make monthly payments of smaller amounts. Entry levels for both lump sum and debit order investments vary from fund to fund and are also readily quoted.
For example, Standard Bank’s unit trust monthly contributions start at R100.These figures are, of course, the minimums, and there is nothing to stop you pumping R10 000 a month into the unit trusts if you are fortunate enough to have that much spare cash floating around.
Lump sum contributions for Standard Bank’s unit trusts usually start at R2E000.
Woodin says the association encourages investors to negotiate reduced charges with management firms. Naturally, he says, the larger an investment the more leverage an investor will have in knocking fees down – but it is worth a shot anyway.
He said the average charge is around 5% of the investment. Should you invest an initial lump sum, this means that a charge of 5% of its value will be levied on your initial investment and then a further 5% each time you top up your investment. The 5% of value would be taken off on a monthly basis should you choose to invest by monthly debit order.
Added to the 5% fee is usually an annual administration fee. Again, this varies from fund to fund. An average charge is around 1% a year on assets in the fund. This charge is often levied monthly and is taken off prior to the income distribution of the cash component of the fund.
Once the forms are signed and submitted the deal is done. Don’t expect to be able to sniff the paper of some share certificates, however.
The most you will be getting from the management company is a monthly statement of the value of your units. And, hopefully, a well-managed investment.