A Unit Trust Fund is a trust which pools money from like-minded investors and invests in a diversified portfolio of securities. There are various schemes that address different needs of investors. The pool of money thus collected is then invested by the Asset Management Company (AMC) in different types of securities. These could include shares, debentures, Treasury and Money Market instruments, based on the investment objective of a particular scheme. Such objective is clearly laid down in the Prospectus of that scheme. The fund generates the income for the investors by way of dividend, interest and capital gains. This is distributed to the unitholders in proportion to the number of units they own.
The main responsibility of an AMC is to manage the funds' investments according its objectives. It also is involved in the daily administration and selling units to investors and cancelling units when investors divest them. An asset management company is promoted by a sponsor which usually is a reputed corporate entity with sound record of profits. An AMC typically has three departments:
Eg. Asset Management Company for Ceybank Unit Trust Funds is The Ceybank Asset Management Limited.
They are an institution independent from managers who monitor the manager's conformance with the trust deed and regulatory requirements. They also create and cancel units at the request of managers, have custody of trust assets and also ensure registration of unit/shareholder.
Eg. National Savings Bank is the Trustee for Ceybank Unit Trust Funds
Unit Trust Fund schemes can be classified as follows:
Open-end funds : An Open-end Fund is one that is available for subscription on an ongoing basis. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices.
Closed-end funds : A fund which has a fixed maturity. Investors can only invest during the initial offer period (IPO)
Growth Funds : The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their funds in equities. Growth schemes are ideal for investors who have a long term outlook and are seeking growth over a period of time.
Balanced Funds : The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their Prospectus. These are ideal for investors looking for a combination of income and moderate growth.
Income Funds : The main aim of income funds is to provide current income at low levels of risk. The funds are suitable for investors who require a regular income.
It is a document which provides investors with important information about the fund. Investors should read it carefully before investing. A prospectus contains descriptions of:
The net asset value (NAV) is the market value of the Fund's assets net of all costs. It is calculated at the end of each trading day.
The price(value) of a unit is calculated based on the NAV and published daily. Units are bought and sold based on these prices
A Unit Trust Fund may receive dividend or interest income as well as trading profits from the securities it owns; this income in turn is distributed to unitholders as dividend. Most open-end Funds offer an option to purchase additional units with the dividends. Dividends are often made annually.
Different funds have different risk profiles, which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Stock market related investments cannot be termed safe with certainty; they are inherently risky. Investors should chose their fund depending on the amount of the risk they are willing to tolerate.
Equity Funds are open to market risk i.e. there is a possibility that the price of the stocks in which the Fund has invested may decrease. Of course, the prices may also go up, making it possible for the Fund to earn profits
It is not possible to assure returns in a volatile market
Unitholders receive a return on their investment in two ways.
Both dividend and capital gains are exempt from tax.
Unit Trust Funds can meet the investment objectives of almost all types of investors. Younger investors who can take some risk while aiming for substantial growth of capital in the long term will find Growth Schemes (i.e. Funds which invest in stocks) an ideal option
Older investors who are risk-averse and prefer a steady income in the medium term can invest in Balanced Schemes (i.e. funds which invest in Stocks and Money market instruments). Investors in middle age can allocate their savings between Income Funds and Growth Funds and achieve both income and capital growth.
Unit Trust Funds are meant for small investors. The prime reason is that successful investments in financial markets require careful analysis which is not possible for a small investor. Unit Trust Funds are usually equipped to carry out thorough analysis and can provide superior return.