One of the most common questions we get asked about investments is:
“How much money will I get out after five years if I invest in unit trusts?”
If you think about it, it’s actually a darn good question…
I mean think about it…if you’re going to invest X amount every month for five years, then surely I must be able to tell you what your return on investment will be? Why invest at all if you don’t know what you’re going to get back at the end of the day, right?
The truth is I can paint a rosy picture of you earning 12% (+12%) each and every year on whatever the amount is that you invest (and many advisors do just this since it’s required by law), but the reality is that you might also earn negative 12% (-12%) for one or two of those five years. Let me explain below!
The concept behind unit trusts is quite simple…
A large group of people pool their money together by handing it over to a professional fund manager. The fund manager then invests it across a broad range of shares. Depending on the fund, the manager can invest as he or she sees fit (within limits of course), or they must stick to a pre-defined mandate. For instance, An equity fund must be fully invested in the equity market at all times. He or she can’t decide that equity is too risky and then pull out!
Why hand your money over to someone else?
Individually, many of us don’t have enough money to buy a variety of top-quality (blue chip) shares.
As I write this, the share price for Sasol shares is standing at R367 a share. And to add to this, you can’t just buy one share at a time either. So if all you can afford to invest is R500 per month then unit trusts make perfect sense.
What’s also important when it comes to investing is to spread your risk amongst a number of different shares in different industries. For instance, investing all your money in gold dramatically increases your risk of loss over time. Far better it is to invest some of your money in banks, some in mining companies, and some in retailers. That way, if banks underperform, you still have the hope of mining stocks (or retailers) overperforming in order to carry your banking loss.
Unit trusts allow us to own some of the best companies in South Africa by simply investing small amounts of money each month.
What a unit trust does is pool your money together with thousands of other small investors. The unit trust manager then invests in:
- Money markets (which is basically cash)
- Specialised assets such as gold
This pool of investments is then divided into identical units with each unit containing the same amount of each asset. So, for instance, if the unit trust has bought shares in SAB Miller and Anglo-American, then each unit will have identical exposure to the shares of SAB Miller and Anglo-American.
Each investor now shares proportionately in the:
- income, and
And here’s getting back to the question I asked right in the beginning…
The share price of SAB Miller and Anglo-American can rise or fall depending on market sentiment and the performance of these companies.
If demand for gold drops or SAB Miller runs at a loss for the year (which I highly doubt!), then the value of their shares will in all probability also drop.
And if the value of these shares drop then the value of your units drop as well.
This is why I cannot predict the future value of your investment…None of us knows what the future holds. We aren’t involved in the day-to-day management so we don’t know when to buy and when to sell. This is why unit trust management companies employ teams of analysts.
A far better strategy for the layman (that’s you and me!) is to invest for the long term and diversify across a range of investments. Unit trusts offer a logical and affordable choice when it comes to this.
InsuranceFundi has partnered with some of SA’s most reputable insurance and investment companies. We believe that everyone should have access to a wide range of comprehensive and affordable solutions. Pick the product you are interested in below, and expect a call-back from our partners.
Until next time.
The InsuranceFundi Team