Investing 101: Unit Trusts
Unit Trust Investments
People are sometimes put off starting to invest because of the notion that it’s “only for the wealthy”.
This could not be further from the truth! There’s an affordable, efficient option for savings and investments known as Unit Trusts.
What is a Unit Trust?
Essentially, money from many different investors is pooled together into a ‘fund’ and investment is directed by a fund manager to achieve a growth. The fund manager often invests in Shares of companies listed on the stock market, or Bonds issued by companies or governments.
The fund is split into individual units - which are what you buy when you invest. The value of each unit is linked to the value of the overall fund assets. The assets are packaged under a trust deed so that your investment is protected.
You can find a list of all the Unit Trusts in Botswana here.
How Does it Work?
Money you invest is pooled together with other investors’ into a single fund, held in trust by a custodian.
The fund manager directs the investment of this money into a variety of assets – to diversify and mitigate investment risk.
The total fund is divided into equal units, which are what investors buy.
Over time the value of the assets change - the aim of the fund manger is to grow the value. If the assets grow in value, this results in a higher price for the units that you own.
You exit the fund by selling your units at the “bid price” – for you to profit this needs to be higher than the “offer price” that you initially paid for the units.
The Botswana Unit Trust market
In Botswana we have six asset management companies offering unit trusts. The average minimum investment is just P200 per month.
See, it’s really not just for the wealthy - a little truly goes a long way. It can work as an emergency fund, a targeted savings account and even an education fund for your children.
Why a Unit Trust?
A unit trust doesn’t require you as the investor to actively manage it. It’s mostly suitable for investors who want to buy shares and other assets but have limited time or expertise to monitor or manage the investment themselves.
A key advantage with unit trusts is diversification. Buying one unit in a unit trust spreads your money across different assets. This reduces your risk exposure significantly.
Another positive takeaway is the easy accessibility. With most unit trusts there are no lock-in periods or fixed terms, you are able to put your money in today and pull it out tomorrow.
Lastly, you have the assurance of security as your investment is protected by a custodian, managed by professionals and regulated by NBFIRA.
Money Market Funds
The most popular unit trusts in Botswana are Money Market Funds. These are low volatility investments, currently offering an average net return of 5.5% after costs - so you’re much better off putting your money there than at the bank.
There are costs built in to the fund - such as asset management fees which are usually around 1% per year, but there is no cost to enter the Money Market fund or to exit it.
As the money market fund invests in interest bearing assets, there’s a withholding tax of 10% of your interest, paid to BURS on your behalf.
The benefits certainly outweigh the costs. You don’t have to save a million but you might get there eventually if you start now. Do enough today to be able to look your future self in the mirror and say, “You did good.”
Get in touch with an SCI Financial Planner today - to help you set up your Unit Trust portfolio
Written by: Lorato Masedi, Financial Planner with SCI Wealth in Gaborone