Understanding Unit Trust Funds and Why It Matters to Investors

Unit Trust Funds (UTFs) are investment schemes that pool money from various investors. They are managed and invested by professional fund managers in a portfolio of securities such as stocks, bonds, and other money market instruments or other authorized securities to meet the objectives of the fund.

The pooled money in UTFs earns income in the form of dividends, interest income, and/or capital gains, depending on the asset class the funds are invested in. Investors in a unit trust fund are usually issued with units, which act as a portion of the underlying portfolio of securities, in exchange for the amounts invested.

Unit Trust Funds in Kenya are governed by the Capital Markets Authority and regulated under the Capital Markets Collective Investments Schemes Regulations, 2001.

According to the Regulations, a UTF should have a Fund Manager, a Trustee; as well as a Custodian. The Fund Manager administers, manages, and ensures that the funds from their investors are invested in accordance with the fund’s investment objective.

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A custodian is a company, usually a bank, approved by the Authority to hold in safe custody the funds/ assets of a collective investment scheme/ unit trust. Trustees, on the other hand, ensure that the investors’ interests are protected at all times.

Unit trusts have a variety of investment vehicles with different risk exposures and returns. The most common funds include;

1. Money Market Funds (MMF) – These are funds that invest in short-term debt securities like bank deposits, short-dated treasury bills, and commercial papers. The investments are relatively low risk, highly liquid, and are best suited for risk-averse investors who wish to get high-interest returns and stability on their portfolios,
2. Equity Funds (EF) – These are funds that buy ownership in businesses often in the form of publicly traded stocks. The funds invest largely in equities with the aim of offering superior returns through capital appreciation or dividend payment over the medium to longer term. They are best suited for investors with a high-risk appetite as the funds are characterized by high volatility,
3. Fixed income funds – These are funds that invest in short-term debt securities and aim to offer a reasonable amount of interest return and capital growth on investments such as treasury bills, treasury bonds, and corporate bonds. The funds are relatively low risk and are suitable for risk-averse investors seeking security and regular income from their investments.
4. Balanced funds – These are mutual funds that invest in a diversified portfolio of equities and fixed-income securities. The diversification aspect helps in hedging against risks and thus, the fund is designed for investors who seek to invest in a balanced portfolio offering exposure in all the market sectors.

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Depending on the level of risk appetite, an investor can choose to invest in a unit trust fund that best suits their investment objectives. Some of the advantages of investing in UTFs are:

1. Professional fund management – Unit trusts are managed by professional fund managers who invest the funds in a structured manner as opposed to investing in a random fashion. UTFs give investors the opportunity to tap into the expertise of fund managers who have crucial information about the market. Pursuant to the funds objective, fund managers screen for better investment opportunities,
2. Investment Security – The investor is assured of the fund’s security as each fund is supposed to have a trustee who oversees the overall operations of the fund. Despite the risks involved in any investment, unit trusts are well regulated by the CMA which bars fund managers from taking certain risks,
3. Attractive Returns – Unit trusts offer considerable returns as compared to traditional investment products or bank deposits and have overtime proven themselves to beat inflation,
4. Investment Diversification – UTFs ensures diversification through investment in a variety of asset classes through which they provide an avenue for small scale investors to get exposure to a wide range of investments which would otherwise require one to have a lot of capital to access,
5. Liquidity – UTFs ease the process of buying and selling units compared to investing directly in shares of firms whose opportunity to transact depends on the supply and demand at the time. Additionally, investors do not have to wait for a buyer of their units since the scheme can issue new units or redeem existing ones at any time, and,
6. Access to broad investment assets – Through Unit Trust Funds, investors gain access to investment products inaccessible to an individual investor such as government and corporate bonds, which are restricted to institutional investors.

There being a wide range of investment products, an investor can make an investment decision based on one’s investment goals, risk appetite, liquidity status, and desired return. For an investor to thrive in the investment market, one is required to apply informed investment strategies to the selected investment options.

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In the case where an investor has no such knowledge or is not sure where to invest in, it is recommended that he/she seeks advice from a financial advisor who will guide him/her on the asset class to invest in based on their risk appetite and investment needs.