Introduction to Unit Trust
This is the article that I wrote way back in 2006 and posted it to ezinearticles.com. I write it again here so that people can get to know what are unit trusts? Its benefits etc. So far those who would like to become a unit trust consultant has benefited from this blog. Thus, I wish to expand my readership to those who don’t want to become consultant but would like to invest in unit trust.
What are Unit Trusts?
Unit Trusts are a form of collective investment that allows investors with similar investment objectives to pool their funds to be invested in a portfolio of securities or other assets.
The manager of the fund then invests the pooled money in a portfolio which may include the asset classes such as Cash, Bonds & Deposits, Shares, Property and Commodities.
Benefits Of Unit Trust
It is tough for an individual to maintain his own portfolio of investments, he needs to keep up to date with market information and sentiment.
By investing in unit trusts most of the necessary ‘know-how’ of investing are transferred to those best equipped to handle it i.e. the professional fund managers.
The advantages and benefits of investing in unit trusts are:
A larger pool of funds allows the fund manager managing the unit trust to purchase a wider range of investments. Rather than concentrating an investment portfolio into one or two investments or shares, a portfolio of market securities can be held. The wider the spread of investments, the less volatile (i.e. variable) the investment returns will be. In simple terms, investment into unit trusts means diversification of risk: “not putting all your eggs in one basket.”
Most investors require that their investment be liquid. That is, they can easily buy and sell within a short period of time. Unit trusts provide this benefit, being bought and sold easily. An excellent return that cannot be “cashed-in” (i.e. sold) does not necessarily mean a good investment as poor liquidity constitutes an additional risk factor for the investor.
Professional Fund Management
The people making investment decisions for unit trust holders are professionals. Their training and background ensures that decision making is structured and according to basic investment principles. In the process, unit trust funds enjoy the depth of knowledge and experience that fund manager bring. In the long term, it is this expertise that should generate above average investment returns for unit trust investors.
Affordable and Investment Exposure
For the individual investor, it is sometimes difficult to gain exposure to a particular asset class. For instance, if an investor with USD3,000 wanted to gain exposure to the property market, global equity markets and bond market, it would be impossible to simultaneously hold a direct investment portfolio in all of these markets. With unit trust investments, it is possible to spread your money around to all of these asset classes at the same time, so that the investor can gain the investment exposure he requires.
Wholesale Investment Costs & Access to Investments
When making small investments, the investor faces costs and charges that are much higher. Unit trust funds are investing with large amounts, so that the economics of the transaction are more favorable i.e. the fees and charges/brokerage etc. per investment ringgit are likely to be less.
Also, because fund managers invest in larger amounts, they are able to get access to wholesale yields and products which are impossible for the individual investor to obtain.
Funds for All Type of People
There are many different types of funds that will suit to any level of risk to cater different type of people.
Safe and Secure
Unit Trusts only make investment and do not give out loans thus, the situation where liabilities more than assets will never arise.
More free time
Yes, we have to monitor our investment performance but since the fluctuation of the unit trust fund is not as frequent as stock market and that we have our Professional Fund Manager to look after the investment, we may keep track the fund on a weekly basis. More free time for us.
Unit Trust has proven that it is an excellence hedge against inflation. Unit Trust in some countries has shown a return of between 10% to 15%.