Make sure you're not paying extra for your unit trust fund in return for mere market performance
The unit trust market is South Africa is massive. There are literally hundreds of funds out there waiting for your investment rand. But there is a chance that some of them aren't what they first appear to be. Invest in one of these funds and you could be wasting money paying for the expertise of a fund manager for nothing. So what is this all about? Read on to find out what you need to know…
You pay more for an actively managed unit trust
When you opt for an actively managed unit trust,
you’re opting to pay more for the potentially better returns a fund manager is striving to achieve for you.
But in actual fact, some of these funds are not quite living up to expectations, Cris Sholto Heaton in Money Week
explains. Instead of endeavouring to beat the market, these funds are making returns by mirroring their benchmark index.
Why? Because a fund managers’ main concern is for the funds’ performance not to do worse than its benchmark index.
Thinking about it in this way makes complete sense. If a fund doesn’t perform, investors will take their money out the fund. Fund management companies earn their crust from lots of investors investing in their products. They don’t want investors to leave.
So this leads to fund managers being under a huge amount of pressure to stay at least in line with the performance of their benchmark index. And this type of fund management results in a fund becoming a closet tracker.
If the fund’s a closet tracker, you’re paying over the odds in fees
But this doesn’t make it right. You’re paying more money in fees and commissions when you invest in an active fund. You’re paying for the expertise of a fund manager. And if a fund becomes a closet tracker, you’re paying over the odds for a tracker fund.
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Before you invest in a unit trust do your research. Compare the performance over the last few years and weigh it up against the index. All this information should be available on every unit trust’s fact sheet.
So there you have it, why you should make sure you’re not paying extra for your unit trust fund in return for mere market performance.