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There are eight main types of unit trust out there: Here's how to tell which is the right unit trust for you!

by , 14 March 2014

Unit trust are highly popular investment vehicles here in South Africa. But with so many unit trusts to choose from, how do you know which is the best unit trust to invest in? Your starting point, is to understand what types of unit trusts are out there…

What is a unit trust?

Put simply, a unit trust is a trust that manages a portfolio of stock exchange securities in which small investors can buy units.

They’re a great vehicle for investors because they give you access to a wide variety of investments in a very cost effective way.

“What investments?” you ask.

Well, that depends on the type of unit trust you invest in. Let us explain…

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Explained: The difference between the different types of unit trusts

Here’s how slideshare.net defines the many types of unit trusts you’ll come across when deciding which the best unit trust to invest in is:

#1: Balanced Funds
A balanced unit trust fund has a portfolio comprising of a mix of equities, fixed income securities and cash. They’re perfect for investors who want to reduce the risk of investing in the major asset classes.

#2: Equity Funds
These are the most common unit trusts out there. They’re made up of a host of listed companies (or equities) based on certain criteria as outlined by the unit trust’s specific mandate. For example, you get equity fund unit trusts that only invest in a specific sector (e.g. constructions shares) or a specific type of share (e.g. large-caps).

#3: Fixed-Income Funds
Fixed-income funds invest mainly in fixed-income products like bonds and money market instruments. The objective, as the name suggests, is for this type of unit trust to provide you with a regular source of income. It’s a great vehicle for retirees who need extra cash.

#4: Index funds
These unit trusts invest in companies that closely match (or “track”) a particular index. For example the industrial sector.

#5: International equity funds
International equity fund unit trusts only differ from other equity unit trusts in that they invest in offshore companies not local ones.

#6: Money Market Funds
“Money market funds invest in liquid, low risk money market instruments that are in effect short-term deposits (loans) to banks and other-low risk-financial institutions, and in short-term government securities,” explains eunittrust.com.

#7: Real Estate Investment Trusts (REITS)
Fairly new to the SA unit trusts market, a REIT is a listed company or property unit trust that invests in immovable property, receives income from rental and pays it through to its investors. It does all the hard work as it buys, manages and operates the property. (You can read more about them here.)

#8: Shariah Funds:
Finally, there are ethical unit trusts – or Shariah funds – that invest into Shariah compliant investments. This excludes companies involved in activities, products or services related to gambling, alcoholic beverages, etc.

There you have it, now that you understand what type of unit trusts are available, you’ll be able to weigh up your options when deciding on the best unit trust to invest in.

There are eight main types of unit trust out there: Here's how to tell which is the right unit trust for you!
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