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Investing: Unit Trusts

What are unit trusts?

A unit trust is an investment which allows a number of investors to pool their funds together to gain investment exposure to many different assets classes such as shares, property, bonds and money market instruments.

Every unit trust fund is divided equally into portions called units. The price of each unit is determined based on the value of all the investments in the fund. These funds are then managed by an investment professional who attempts to grow the underlying assets in the investment.

Different unit trusts have different fund objectives, some unit trust funds are focussed on providing a reliable monthly income whilst other unit trust funds are focussed on delivery long term capital growth. Based on the mandates of the fund, the investment manager attempts to earn returns through capital growth, or income or a combination of both.

Every unit has a value. An investor is able to purchase units based on this value. If the unit price is R1 per unit, an investor can purchase units based on that value. The price of this unit fluctuates and can go up as well as down. If an investor purchases R10, 000 worth of units at R1 then he has 10, 000 units.

Should the price of this unit increase to R2 the value of the investment will be R20, 000, similarly if the unit price was to decrease by 10% then the value of the investment would decrease by 10%.

Because funds are pooled, investors are able to gain access to underlying assets at reduced costs. Unit trust funds provide for diversification as not all your funds are concentrated into one sector or specific share or commodity. Unit trusts are easily accessible and can be purchased or sold, providing for liquidity for investors. From as little as R500 per month Investors are able to gain access to unit trusts.

Unit trust investments offer investors a chance to invest in a wide selection of underlying assets, which provides diversification yet allows the investor the chance to partake in assets that might not be readily accessible or affordable to an individual investor. Investors can have confidence that their funds are being managed by an investment professional in accordance with the specific fund mandate.

For more information or questions on how to invest in unit trusts please contact us.

Investing: Compound Interest

What is Compound Interest?

Compound interest is the interest that is earned on the principal sum of an investment. Interest is then earned on the initial amount and the reinvested interest. This is often referred to as earning interest on interest. The effects of compound interest can best be illustrated by the telling of an old Indian fable…

The legend goes that a wise old sage was making his way through India. The king at the time was an avid chess enthusiast and often challenged visitors to his kingdom to a game of chess. As to get the wise old sage to accept the challenge, the king offered the sage any reward he so wish.

The wise old sage considered the kings offer and replied by simply requesting that if he should win the game that a single grain of rice be placed on the first square, 2 grains of rice on the second square, 4 on the third, 8 on the fourth, 16 on the fifth and so on and so on.

The king, thinking the request was a modest one, quickly agreed to this and the game of chess was played. The wise old sage defeated the king. Upon losing the chess match, the king being a man of his word requested his advisers to bring a bag of rice to pay the wise old sage. After a week of counting, the advisers to the king returned to inform the king that there was not enough rice in the kingdom to repay the wise old sage.

The king had failed to see how powerful the effect of compounding could be. There are 64 squares on a chessboard, for the king to have been able to fulfil the wise old sage’s request the king would have needed to give 18,466,744,073,709,551,615 grains of rice to the wise old sage.

Investors looking to maximise the benefit of compound interest, should remember that time is the magic ingredient, and that compound interest works best for the investor given the time to grow exponentially.