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Understanding unit trusts: How they work and why they could work for you

by , 23 February 2015

If you want to start investing in the stock market, the idea of picking stocks may put you off. And that's not the only thing. You need to have a sizeable chunk of cash available to invest too.

But you do have an alternative. And that alternative is unit trusts.

Unit trusts take out all the worry of picking shares to invest in and they're affordable too.

Let's take a closer look…

What are unit trusts?

Unit trusts or funds are basically a collection of shares.

For example, if you decide to invest in a unit trust concentrating on the JSE’s biggest companies, you’ll effectively hold shares in companies like Sasol and Anglo American.

The easiest way to think of a unit trust is to imagine you and your friends pooling your money to invest on the stock market and employing a fund manager to do all the stock picking for you.

There are a wide variety of unit trusts to invest in. For example, you can invest in different types of equities, sectors, precious metals and property.

The fees and costs of unit trusts

Of course a fund manager doesn’t offer unit trusts for free. There are fees and costs involved.

The two main fees you’ll have to pay are:

  • An initial fee when you first invest; and
  • A management fee.

It’s worth looking around though before you select a fund to invest in and compare fees.

Why you should consider investing in unit trusts

If you want exposure to the stock market without investing yourself, unit trusts are one way to go.

Not only that, you can invest from as little as R200 a month with some funds. This makes it affordable. You can also invest lump sums.

Investing in unit trusts also gives you instant diversification as you’re effectively investing in a number of different shares in a fund. You could add to this diversification by investing in different types of funds.

If you want to start researching unit trusts you can have a look at information online. All unit trusts have a fact sheet. Fact sheets include what the unit trust invests in, how risky the fund is, how much you can invest with and the past performance of the fund.

So there you have it. How unit trusts work and why they could work for you.

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Understanding unit trusts: How they work and why they could work for you
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