Unit Trust 101

A primer on unit trusts

What is a Unit Trust?

Simply put, a unit trust fund is a way for you to invest your money.

A unit trust is a collective investment scheme which pools together into one account, all the contributions made by many investors with a common investment objective. The money is then used to purchase a portfolio of financial securities. In exchange for the money, the unit trust issues units to the investors, who are then known as unit holders.

A unit trust is set up by Trust Deed and is an independent legal entity, maintaining its own financial accounts and filing its own tax return. The Trust is administered by its Trustee, often a reputable bank.

What is an open-ended Unit Trust?

Open-ended Funds are funds where investors can enter the fund at any time and existing investors can exit out of the fund at any time. There is no restriction on the number of units to be issued by the fund and the fund has no maturity. The units are purchased from and sold to the Fund Management Company.

What does the Unit Trust invest in?

Depending on the objective of each unit trust, the type of securities to be bought can comprise of equities (shares), bonds (debentures), cash, bank deposits etc. The objective of the trust is clearly laid out in its Explanatory Memorandum or offer document which investors must read and understand prior to investing

The unit trust portfolio is managed by a professional fund manager, and the cash as well as the securities are held by a custodian.

How does it work?

The pool of investor contributions is divided into equal units where each unit contains the same proportion of assets in the fund. Investors then share in the fund’s gains, losses, income and expenses.

Units have a price called a Net Asset Value (NAV).

Each contribution remitted to the unit trust, via its Trustee, after deducting any front end fees, is used to purchase an equivalent number of units. And each unit represents an equal fraction of the total value of the overall unit trust portfolio. This unit is very transparent as it has a daily price which is published in a national newspaper and on this JB Vantage website.

How many units will I receive?

When you purchase a JB Vantage Unit Trust, the number of units you will receive is calculated by dividing the investment amount by the offer price at the time of purchase.

For example, when you purchase at a price of Rs. 12.4853 and you invest Rs. 1,000,000, you will receive 80094.19 units. This number of units will be shown on your confirmation receipt and later in the semi annual statement. The value of these units will then change in accordance with the price of the unit trust. The price of the unit trust is dependent on the development of the securities (sometimes called underlying assets) that are bought for the unit trust by the fund manager. So if you buy at another point of time, the price may be different, let’s say Rs. 12.6893, you will then receive 78806.55 units.

Why invest in Unit Trusts?

Pooling your money with other investors can offer these advantages:

  • Diversification. A single unit trust can most likely hold more securities than you as an individual or a company could buy on your own.
  • Professional management. An advisor handles the trusts’ investment management responsibilities, taking the burden off you to keep track of them yourself.
  • Convenience. Units can be bought and sold any business day, so you have easy access to your money.

Why can I trust a unit trust?

As the name of the product already indicates, a unit trust is defined by a “trust” framework. This legally installs an independent trustee who holds the investments and monitors the actions of all involved parties. The trustee safeguards the interest of all unit holders.
Additionally, unit trusts are regulated by the Securities Exchange Commission of Sri Lanka. The regulator ensures that unit trusts are monitored and checks all involved professionals and organizations.

What are the different types of Unit Trusts?

Money market funds

These funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper, securitized trust certificates and fixed deposits. They are generally a safer investment, but with a lower potential return then other types of unit trusts.

Gilt edge funds

These funds invest in short-term treasury securities such as treasury bills, treasury bonds, and repurchase agreements with term to maturity of less than 12 months. Gilt-edged securities are the only 100% risk-free investment option available in the market.

Fixed income funds

These funds buy investments that pay a fixed rate of return like government bonds, investment-grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the fund on a regular basis, mostly through interest that the fund earns.

Equity funds

These funds invest in stocks (shares). These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money. You can choose from different types of equity funds including those that specialize in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.

Balanced funds

These funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.

Index funds

These funds aim to track the performance of a specific index such as the S&P 20/ASPI Index. The value of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.

Specialty funds

These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

How much capital in currently invested in Sri Lankan Unit Trusts?

Presently there is approximately Rs. 128 billion invested in Sri Lankan unit trusts. Approximately Rs. 15 billion of that is invested in equity unit trusts. (December 2017)

Who invests in Unit Trusts?

Covered individuals of companies, busy professionals, business owners and everyday investors who are willing to delegate to fund managers are a great example.

How long have Unit Trusts been around?

Globally, unit trusts (or other forms of collective investments) have been used since the 1930s. In Sri Lanka, unit trusts were introduced during 1991/92 where four fund management companies obtained licenses from SEC to operate four funds. At this time, an investment relief was granted to the investors who invested their monies in Unit Trusts during the first year of operation. JB Financial was licensed to operate its first unit trust in July 2011.