May 29, 2024

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Do you plan on investing? Unit trusts can be a viable investment option – Hassan Kitenda,

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Do you plan on investing? Unit trusts can be a viable investment option.

We can all agree that investing is a good habit to have. Investing is how you take charge of your financial security. It is also one of the key ways of achieving one’s financial goals. It’s inevitable that as we go through life, our financial goals will change at different stages of our lives. Depending on where you are in life, you may be saving for your child’s education, buying a house, creating an income generation stream, creating an emergency corpus, saving money for the short term, or planning for retirement as its always an omnipresent financial goal for people during their working lives. There is no solution to it all. In order to cater to a wide range of investor requirements, various financial institutions have come up with various types of investment schemes known as unit trusts.  

Essentially a unit trust is a collective investment vehicle that pools money together from other investors with similar investment objectives and is managed by a professional fund manager who invests the pooled money in a portfolio of securities such as treasury bills, bonds, shares, call deposits, and other money market instruments to achieve the objective of the fund.

A unit trust fund is made up of units that have a unit price that changes every day. For example, when you invest Ush 2,000,000 in a unit fund whose current unit price is Ush250, you will be issued 8000units. The price of the unit trust is dependent on the value of the securities that are bought for the unit trust fund by the fund manager, if underlying investments perform well, the unit price will rise. If the underlying investments underperform, this will be reflected in a fall in the price of a unit.

There are different types of unit trusts in the market, the type of fund you choose to invest in will depend on your appetite for example equity and balanced funds provide the highest potential return, but are also associated with the highest volatility. Fixed income instruments are less risky, but also with lower potential returns while the most secure unit trust funds are generally the money market funds as they invest in short-term securities. In Uganda, investments in unit trusts increased from Shs1.56bn as at the end of 2013 to Shs 173.5bn at the end of June 2019. So, why should you invest your hard-earned money in unit trusts?

A good portfolio needs to be diversified across a number of asset classes. Creating such a portfolio requires significant skills and time. Investing in Unit trusts will represent an efficient way to build a diversified portfolio. Unit trusts unlike a lot of other investment vehicles, help you create a diversified and balanced portfolio. So, while some portion of investment can have equity exposure to provide long-term growth, it can also be balanced with fixed income products to manage the risk for providing regular income. In theory, by not putting all your eggs in one basket, your risk is better to spread out.

Well, it should be put in mind that these funds are managed by experienced & qualified fund managers whose job is to take investment decisions based on solid research & investment processes. Managing risk is an important consideration while making investment decisions. Often people do not have the expertise to carry out research and are not able to put a focused effort to monitor markets & economies. On the other hand, a fund manager’s job is to keep a track of all these variables and churn his portfolio to maximize investor returns.

Unit trusts are highly regulated and investors can be confident that while they are subject to investment risks, they are not likely to be victims of fraud or embezzlement. Unit trusts in Uganda are regulated by the Capital Markets Authority.

One of the best things about unit trusts is that you don’t have to be rich to benefit. They are designed for everyday people earning normal salaries. You can invest a lump sum or make regular monthly contributions, often starting at around 100,000ugx per month.

Income generated by unit trusts is exempt from tax, so unit trusts are one of the most tax-efficient ways to invest your money.

Unit trusts are highly liquid, funds invested in unit trust investments can easily be redeemable either the full or partial investment without loss of value.

Unit trusts publish their daily and effective annual yields, and thus an investor can therefore always confirm the value of their investment as well as benchmark the performance against other unit trusts. It is also mandatory for the scheme to issue monthly statements showing an investor’s investment position.

The decision to invest is an acknowledgment that it comes with certain risks. Therefore, make sure to invest in the right fund after doing proper research. Consider working with a financial professional to help guide you on your wealth-building journey.

Hassan Kitenda, CAIA  is an equity and fixed income research analyst.


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