Why You Should Consider Investing In Unit Trusts

Written by Wellington Ayugi

Local investors have continued to experience a bear run that has destabilized the Kenyan equity market. Investors had anticipated a return to some normalcy, but the market has still remained unpredictable.

However, despite the uncertainty prevailing in the Nairobi Securities Exchange, one can still explore various investment channels such as a Unit Trust.

According to Mr. Robert Ochieng, an analyst at Relic Capital, unit trusts are the perfect basket for one’s short-term investments because they give investors higher returns in comparison to savings accounts and fixed deposit accounts. 

Of particular interest is the fact that some of the unit trusts offered to investors last year yielded better returns compared to the somewhat average returns from T-Bills.

Unit Trusts such as Gencap and Pesa Fund recorded yields of 18%. These returns were higher than the average yields on treasury bills (9-12%) during the same period.

What are Unit Trusts?

Unit Trusts are collective investment schemes that are professionally managed that allow for investors with similar investment objectives to pool their funds together.

The funds accumulated are then invested by a professional fund manager in a diversified portfolio of assets such as shares, T-Bills or bonds in order to earn interest on that investment.

Should the value of the group assets increase, the investors will get returns in proportion to their investment. The Capital Markets Authority even rated unit trusts as a good investment option for investors as it simplifies the process of conducting transactions.

Types of Unit Trusts

The various types of unit trusts one can invest in include:

  1. Equity funds: This is a unit trust where the majority of its assets are held in securities or equities of listed firms. It is the most common type of unit trust in the country.
  2. Fixed-income funds: This is a unit trust where the majority of its funds are invested in government securities; money market instruments such as fixed deposits and bankers acceptance; and corporate bonds. The goal of this trust is to typically provide a fixed income with a little emphasis on producing capital growth for investors.
  3. Money market funds: This is a type of unit trust that operates in a similar way to a bank account with the unit price set at a fixed amount. It usually invests in short-term government securities such as T-Bills or in low-risk money market instruments.
  4. Balanced funds: With this type of unit trust, investors may opt to have an investment in all the major asset classes instead of investing in a single asset class so as to diversify their risk.

You Should Consider Investing In Unit Trusts Because:

  1. They are generally considered to be a safe and secure investment
  2. The investment risk is usually considered to be lower than other types of investment
  3. Unit trusts are considered to be easy to sell
  4. It is quite simple to track how your investments are performing in the market
  5. You do not need huge sums of money

How do I Invest In A Unit Trust?

There are two common ways of investing in unit trusts:

  • Depositing a lump sum: In this case, an investor puts a lump sum of money into the unit trust and will be the only investment he ever makes. The initial investment will increase over a period of time as the fund earns interest. When the sale occurs, the unit price will reflect the compounding of capital and accumulation over the relevant time periods.
  • Depositing regularly: Some people prefer to make regular monthly contributions to their unit trust funds. This is a disciplined, ideal and useful way to accumulate money for a future need. By investing in small amounts over time, the sale price per unit will represent all the accumulated funds at the end of the investment period, plus the total returns generated during the same period.

Understanding the Fees Associated With Your Unit Trust

Like any other investment, unit trusts have some fees that are associated with them. The most common fees associated with unit trusts are initial and management fees. However, they vary from one type of fund to the other. For instance, some companies may choose to charge them on the interest, while others on the principal. As an investor you can expect the following fees:

  1. Initial Service Fees: This is the fee charged to the investor to cover his distributing, marketing and monitoring costs by the unit trust consultant for the time the trusts are held. It is usually the first fee that is levied on the investor.
  2. Yearly Management Fee: These are the fees that are extracted from the fund by the management for administration expenses such as audit costs, custody costs, and managers fees. 
  3. Exit Fee: This is the fee charged on an investors proceeds when they exit the fund.

In Kenya, unit trusts are legally referred to as Collective Investment Schemes. Below is a list of popular unit trusts operating in Kenya:

The type of fund you choose to invest in will depend on your appetite for risk. For example, if you are looking for security and income for your funds, the fixed-income funds or money-market funds will be your best option. However, if you crave more risk and higher returns, an equity fund trust will be more suitable.

For investors seeking both capital growth and current income, a balanced fund will be suited to their needs. If you are just starting out, it would be best to invest in money market funds, over other types of unit trusts. As you grow your investment steadily you can try the other options. 

A unit trust is able to offer you an investment cushion where a manager performs all the ground work and you do not have to worry about tracking your investments every day. 

Would you ever consider investing in a Unit Trust? What type of Unit Trust would you prefer? Share your thoughts with us below.

Learn More:

  1. What Are Unit Trusts?
  2. Why Unit Trusts are better Than Bank Savings Account


About the author

Wellington Ayugi

Wellington Ayugi handles Business Development at Covered and has a passion for personal finance, microfinance, and developments in financial technology