The Easiest Way To Invest On The Stock Market With Minimum Hassle
For many new investors, the very idea of dealing with a stockbroker and buying individual shares is nerve racking, if not downright scary.
If this is the situation you find yourself in, what if you could invest on the stock market without having to deal with a stockbroker?
And what if you could invest on the stock market without the need to pick individual shares?
This is where unit trusts come in.
You can invest in these funds without using the services of a stockbroker or picking individual shares.
And not only are these investments easy to understand, they’re incredibly easy to invest in and affordable!
So are unit trusts the right investment for you?
Let’s take a closer look and find out…
What Exactly Are Unit Trusts?
When you invest in unit trusts, you buy units in a fund.
The more units you hold, the larger your investment.
By investing in unit trusts, your money pools with the money of a number of other investors.
A fund manager then puts this money to work on the stock market.
There are a wide number of different types of unit trusts.
For example, some track the performance of an index, like the Top 40 Index.
Others track the performance of particular sectors, such as property or mining companies.
And some invest in other financial markets, such as the bond market.
Why You Should Invest In Unit Trusts
There are a number of benefits to investing in unit trusts…
Reason To Invest In Unit Trusts #1: Diversification
By putting your money to work in unit trusts you gain instant diversification.
Diversification lowers your overall investment risk.
If you opt to invest in individual stocks, creating a diversified portfolio is much more time consuming and requires a larger investment.
You can also easily gain exposure to offshore stock markets.
This can add additional diversification to your portfolio!
Or you could opt to invest in lower risk unit trusts that focus on the bond and money markets.
By investing in a handful of different unit trusts, you can easily build a well-diversified portfolio.
Reason To Invest In Unit Trusts #2: Easy To Invest
To invest in unit trusts, you don’t need the services of a stock broker.
You can invest with a dedicated fund management company, through your bank or with the assistance of a financial advisor.
What is also appealing about unit trusts is they’re much more affordable than investing through a stockbroker.
You can start investing with as little as R200 a month or you can opt to invest a lump sum.
Reason To Invest In Unit Trusts #3: Tax Efficient
With the introduction of tax free savings accounts last year, you can now use your allowance to invest in unit trusts.
This means any profits you make from your investments are free from tax!
To benefit from this, you need to invest using one of the many different tax free savings accounts on offer.
The Downsides of Investing In Unit Trusts
Whilst there are a number of benefits to investing in unit trusts, there are also some downsides you need to consider before investing…
As with other financial products, there are costs and fees to weigh up.
These vary from unit trust to unit trust.
You have to pay an initial fee.
You may be able to negotiate slightly on this amount.
Then there is the annual fee to consider.
This varies depending on the type of unit trust you invest in.
Some unit trusts aim to track the market, whether that be the Top 40 Index or the Gold Mining Index.
These are passively managed unit trusts.
With these types of funds, you’ll pay a set fee per year.
Others aim to better the performance of the market.
These are actively managed unit trusts.
If a fund manager outperforms the market, you’ll also have to pay a performance fee, which is usually an additional percentage to the standard management fee.
You need to pay close attention to the fees you’re going to pay before you invest.
After all, the higher the fees and costs, the larger the impact on your returns!
Just like other investments, by investing your money into unit trusts you run the risk of losing money.
If the stock market takes a hefty tumble, you may have to wait out years to make your money back, whilst still paying fees.
In fact, it was recently reported that a unit trust from Cape Town lost 66% over the course of 48 hours!
Now this isn’t standard unit trust performance, but the fact is it can happen and you don’t want to get caught when it does.
The Unit Trust Investor’s Best Friend
If unit trusts sound like the perfect investment for you, you need to get to grips with unit trust fact sheets.
For each unit trust, there is a corresponding fact sheet. This fact sheet gives you a wealth of information about a unit trust.
A unit trust fact sheet contains:
The mandate tells you exactly what a unit trust invests in.
For example, if it tracks a specific index or sector in the stock market.
This part of the fact sheet also tells you the risk associated with the unit trust and how long you should consider investing for.
The fact sheet describes how much money you need to invest on a monthly basis or in a lump sum.
It also tells you what the initial fee and management fees are.
You will also find the total expense ratio (TER) here.
This tells you the costs of a fund as a percentage of its assets under management.
A lower TER can indicate a cheaper fund, but this isn’t always the case.
For instance, if you opt to invest in an actively managed unit trust and the fund manager performs well, the TER will be higher due to the performance fees payable.
You’ll find the performance of the fund in comparison to its benchmark index over a year, three years and five years.
For long standing unit trusts there may be more historical information.
From looking at this crucial information you can see how a unit trust has done.
But bear in mind that past performance isn’t a guarantee to what lies ahead.
You’ll also find a summary of the main investments of a unit trust.
For instance, the stocks and size of holding the fund invests in.
The fund manager
You’ll also find information about the fund manager of the unit trust.
Making The Right Investment Decision
Before investing in unit trusts, it’s vital you understand exactly what you’re investing in and the risks that come with putting your money to work on the stock market.
There are many benefits to investing in unit trusts, but you need to understand their disadvantages too.
It’s a good idea to seek financial advice to ensure you’re making the right investment decision for your circumstances and financial position.
Unit trusts are a great investment option if you want to gain exposure to the performance of the stock market without having to spend lots of time researching yourself.
Until then, here’s to profitable investing
The Money Lab