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How Unit Trusts make money for you

December 30, 2020by Nicholas Kabaso0

To secure your financial future, its best you start investing the soonest you can. Unit trusts are the best way to kick off your investments because they are professionally managed – you don’t have to worry about the hassle of keeping up with your investments as your fund manager will keep your investment on track.

It is therefore important that you have a clear discussion with your investment advisor on which unit trust is suitable for you so that you can realize your investment goals. These goals can range from short to medium term and in line with your risk appetite.

Investors are always advised to have a dedicated investment advisor that can help you assess your investment needs and goals and direct you accordingly. It is vital that you only deal with licensed investment advisors to help you make the most of your financial and capital goals.

Unit trusts are tailored to achieve three main objectives namely income generation/protection, Capital Gains and reduced Cost of Investments.

  • Income generation/protection:

Investors are able to earn interest or dividends from the underlying securities in the Fund. The interest and dividends earned by units may be paid out to investors or may be reinvested, increasing the value of your invested capital. Depending on which unit trust you invest in your investment manager will provide you comparable performance benchmarks either inflation, T-Bill or government bond yields.

The advantage of investing in Unit Trusts for income generation/protection is that they are very competitive in interest yields and are flexible enough to allow you as an investors to build your wealth easily. Leaving money in a bank account may be a safe option, but you know that they aren’t going to pay you much on your hard-earned kwachas, right? Hence, by investing in Unit Trusts you counter the common predicament many would-be investors face i.e. they want to invest money, but either they don’t have enough money to invest, or they don’t back themselves to be able to make sound investment decisions.

  • Capital Growth:

Certain Unit Trusts commonly referred to as Equity Funds have a unique offering of investing in securities invested on the securities exchange either Lusaka Securities Exchange or other exchanges worldwide. The competitiveness of such portfolios are unique to each Fund Manager and his investment strategy.  Each Fund Manager will always aim to create a well-diversified portfolio of listed stocks. The choice of these stocks gives each Fund Manager a unique competitiveness over his peer. By investing in these Equity Funds growth of your investment return is primarily from capital gains attributed to increase in share prices of the underlying stocks that the investment manager has in his portfolio. Hence, the key is on choosing the right investment manager.

Equity Funds are generally rated high risk in view of the historical volatility of market performance. Investors can easily lose money if the prices of the underlying stocks falls. It is therefore best not to invest in such options using money that you may need at short notice. This is because if you have no choice but to sell your investment when you need the money, you run the risk of making a loss if the market is down. 

Dividend Income is another stream of income that is expected to be earned on the Equity Funds. It is therefore critical that your Fund Manager helps you with historical Dividend yields across his portfolio as well as his forecasted growth yields. This gives you an opportunity to have a fair outlook of the performance of your investments.

  • Reduced Cost of Investment:

With a dedicated investment manager overseeing your portfolio you are assured of reduced cost of managing your investments. You can trust that your back is covered as these experienced investment professionals make investment decisions that aim to derive the best returns for you on the market. Most Unit Trust allow you to easily switch across portfolios without incurring costs or any additional fees.

In Zambia most investment advisory services are generally free of charge. Hence, expect no front end fees upon opening an investment account. This affords you cost effective investment services that optimizes your investment returns.

Unit trusts are good for medium to long term financial planning. Investors with a short term investment horizon can also maximize their returns in Unit Trusts by choosing the appropriate unit trust that serves their objectives.

The key in making the most for your money is choosing the right investment manager. A good investment manager will always have the best interest of his investors, which means he/she will work to maximize your returns without you having to do it yourself.  Therefore, it is very important that you have an ongoing relationship to allow for effective decision making. Additionally, feel free to regularly engage your investment manager to plan together your various financial goals and assess the performance of your portfolio in the light of economic conditions.

Nicholas Kabaso

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