An easier way of investing in shares and other assets
We have all heard stories of individuals becoming wealthy by investing in shares on a regular basis. But, for most of us, the stock market is a confusing, dangerous place - and we don't have the time or knowledge to build an appropriate portfolio.
Unit trusts provide a way for you to invest in shares, bonds, cash and other securities without requiring a detailed knowledge of the markets. Each unit trust has specific objectives and a portfolio manager who aims to achieve the objective of the portfolio through an investment strategy. This is done by investing the pool of money in the fund in a variety of underlying assets.
Types of unit trusts
The type of asset class of each unit trust is largely determined by the objective of that unit trust.
There are unit trusts that specialise in a particular market sector, such as gold shares, industrial shares or technology shares.
These unit trusts are commonly known as equity unit trusts
.
Other unit trusts may invest in less risky instruments such as bonds. Bonds
are "loan instruments", usually issued by the government to raise money. Unlike equities, which may fluctuate daily, bonds offer a fixed rate of interest
for the entire period of the bond (usually five years or more).
Money market unit trusts
invest in short-term interest-bearing instruments.
These funds have a very low risk profile
with very little volatility. An investment period of six to12 months is suitable.
Wealth comes slowly
Although there are a number of benefits to investing in a unit trust, such as the fact that a unit trust may be purchased for less than R100 a month, it is important to remember that economic markets fluctuate. In order to gain the most from your unit trust investment, equity unit trusts
should ideally be kept for a period of three to five years at least. This way the daily fluctuations are ignored and you can benefit from the expected gradual long-term growth
in the market.
Diversification
Balanced unit trusts invest in all three types of instruments - shares, bonds and cash. This provides important diversification
.
You should always consider diversifying when investing.
This is because, in the event of one company, or even an entire market sector performing poorly, your entire portfolio could lose value. However, by investing across different asset classes, as well as both locally and offshore, you can spread the risk.
Risk
When purchasing a unit trust, it is advisable to seek the advice of a financial adviser
. The financial adviser will be able to determine your risk profile
, based on such factors as your age, marital status, dependents, health and so on. Such a risk profile will determine whether you would prefer an aggressive investment or a more conservative type of investment. Generally younger investors should have a greater appetite for risk, due to their longer-term investment horizon, and may prefer investing in the more volatile equity trusts with higher growth potential in the long term.
Different types of investments
Do not "place all your eggs in one basket". By investing in a number of different types of investments
, should one type of investment, for example, shares, not perform, only the amount of money invested in the shares will be affected. Money invested in bonds
, for example, may provide a better return, therefore reducing the amount of value in the portfolio that may be lost at any given time.