Funds explained: How do unit trusts work?

Fsp Invest, 30 Jan. 2014

Tags: unit trust fund, funds, unit trust, how a unit trust works, costs, fees, investing, investor, diversify, diversification, investment amount, unit trust fees, investing strategy, initial fee, management fee

Unit trust funds provide investors an easy way to invest and diversify. And if you’re new to investing, they are a great way of getting exposure to the stock market without picking shares yourself. But how do unit trusts work? Read on to uncover why…

First of all, a unit trust is a collection of individual shares, the research team at The South African Investor explain…

If, for example, you invest in a fund of ‘blue chip’ shares, you could own shares in companies like Anglo American, Sasol, Old Mutual and Sanlam.

A fund works as if you and several of your friends clubbed together, threw a bunch of money into a pot, hired a professional to manage it for you, and then sat back and waited to grow rich slowly.

Most people build up their unit trust holdings gradually. And one great advantage of unit trusts is you can invest in them from as little as a few hundred rand a month.

There is a huge array of different unit trusts you can invest in. These range from Top 40 companies to financial institutions, from resource companies to property. And you’re not limited to the South African market, there are a number of funds that give you exposure to international markets.

So how much will investing in unit trusts cost you?

The company providing the unit trust will take the fees and charges out of your investment before your money starts working for you. But you should pay attention to these before you commit to a particular fund.

With unit trusts there are two sets of costs you need to pay:
  • The initial fee: This includes the commission to the person who sold you the fund.
  • The annual management fee: This includes the fund manager’s role in managing the fund’s portfolio.
So there you have it, how unit trusts work.

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