A unit trust is a collective investment scheme. Simply described, it is a product that allows investors with similar objectives to pool their money in a portfolio for the purchase of underlying securities. Investment Solutions selects investment managers to invest this pool of money in a wide range of financial instruments such as equities, bonds and cash. This enables investors in the pool to buy into a diversified portfolio of shares, bonds, money-market and other financial instruments they would not normally have access to as individuals. The total value of the pool of invested money is split into equal portions called units. When individuals invest in Investment Solutions unit trusts, they buy some of the units and become unit holders. The unit price depends on the market value of the shares in which the pool of money is invested, and is calculated daily. The value of the units rises and falls because this is linked to the value of shares and other instruments in which the unit trust is invested.

Unit trusts are managed by highly qualified investment managers, specialists whose full-time job is to make investment decisions. Few people have the necessary time, skills or experience to actively manage their investments and research the best ways of making the most of their money on a day-to-day basis. With unit trusts, investors can gain access to expert investment management by trained professionals with proven track records.

Unit trusts are specifically designed to give investors good value for their money. The pooling of money increases the buying power and enables investment managers to buy shares, bonds, money-market instruments and other investments beyond the reach of average investors.

Unit trusts are highly tax-effective investments. Unitholders will only be affected by Capital Gains Tax (CGT) when they disinvest from a unit trust. CGT is calculated on the disposal of units by multiplying unitholders’ marginal tax rate by their inclusion rate (25% for individuals). For investors in the highest tax bracket this works out as an effective 10.5% tax rate on the gain in the unit price. Income earned through dividends and interest is regularly distributed to unitholders. By reinvesting this income, investors benefit from the significant resultant compound growth. Dividend income is not taxed in the hands of the investor. Although interest income is taxable, the first R16 500 of an individual’s total interest income in any year is tax-exempt.

Unit prices are calculated daily according to net asset value, which is defined as the total market value of all assets in the unit portfolio, including any income accrued, less any permissible deductions from the portfolio divided by the number of units in issue. Unit trust prices are quoted daily in the national press. Investors can calculate the value of their investment at any time by multiplying the number of units they own by the unit price of the relevant unit trust portfolio.

Unit trusts are highly regulated. They are governed by the Collective Investment Schemes Control Act (CISCA) and must comply with certain standards and requirements set out by the Association for Savings & Investment SA  (ASISA). The ASISA is a non-profit organisation established in 1967 as the Association of Unit Trusts. It acts as the custodian of codes of practice and standards throughout the industry and is the forum for identifying and fulfilling common goals. Excluding investment risks, unit trusts are safe investments in that investors should not experience fraud, theft or deceit. Also, each management company is required to appoint a trustee, which may be a public company, a bank or an insurance company. A trustee can be regarded as the custodian of a unit trust’s assets, acting on behalf of unitholders to ensure the manager adheres to the provisions of the deed and CISCA in all aspects of managing the unit trust.

Investors can invest a lump sum, which means the entire investment immediately benefits from the growth and income potential of the chosen unit trust, increasing overall returns. Alternatively, a regular amount can be invested each month, which is an easier way of building up capital. A regular monthly investment gives investors the benefit of Rand-cost averaging. When the unit price falls, the monthly investment buys more units, and fewer when the price rises. Over the longer term, investors could end up with more units.

The advantage of liquidity and accessibility is that investors can cash in a part or all of the investment if necessary. Unit trusts are also transferable and investors may invest in somebody else’s name. They are highly liquid investments as the management company guarantees to buy back units and pay the investor the value of these units in cash. This is different from investing in shares, where there is no guarantee of a buyer nor of the price a share will attain.

Unit trusts offer investors a high level of transparency. In terms of CISCA, all management companies must disclose certain information to investors before transacting with them. Information that must be supplied includes all charges, how the unit price is calculated, the objective and risk of the unit trust, when income is declared, the amount of income declared in the previous financial year, as well as full contact details of the management company and the trustee or custodian. Investment-return tables are published regularly in most financial publications and full details of the underlying holdings in each unit trust are disclosed quarterly.

Unit trusts are managed by professional investment managers and give investors access to a wide variety of diversified portfolios of shares, bonds and other financial instruments they would not necessarily as individuals be able to afford --- nor have the knowledge or time to build and maintain such a diversified portfolio.

Unit trusts are highly tax-effective investments. Unitholders will only be affected by Capital Gains Tax (CGT) when they disinvest from a unit trust. CGT is calculated on the disposal of units by multiplying unitholders’ marginal tax rate by their inclusion rate (25% for individuals). For investors in the highest tax bracket this works out as an effective 10.5% tax rate on the gain in the unit price. Income earned through dividends and interest is regularly distributed to unitholders. By reinvesting this income, investors benefit from the significant resultant compound growth. Dividend income is not taxed in the hands of the investor. Although interest income is taxable, the first R16 500 of an individual’s total interest income in any year is tax-exempt.