There are many ways to save and invest. In this article, we will explain the key differences between investing in a unit trust versus a stockbroking account. How do you decide which is best for you to meet a specific goal?

While we will explain how the 2 different options work, it is always best to get professional advice about which may be best for a specific need, or how to combine both in your overall portfolio.    

What is a unit trust and how does it work?

The main feature of unit trusts is that you have the benefit of pooling your money with other investors, and then enjoying the benefit of this pool being professionally managed according to a defined mandate. In other words, the mandate will specify what you will be exposed to, how the money will be managed and invested, and what the limits are from a risk point of view.

How is a stockbroking account different?

A stockbroking account is held only for you, and you can choose exactly how this is invested or do it yourself. With most investment portfolios, you don’t have the benefits of pooled money to invest in the range, breadth and depth of underlying shares and other instruments made available by unit trusts. But with a stockbroking account, you can be very specific about what you choose to invest in and even define the ‘mandate’ for this. You can control exactly what you invest in and get access to professional management with a stockbroking account. You will require a significantly larger amount of money to invest to get exposure to certain types of shares and securities.

Unit trusts are more for the ‘hands-off’ type of investor

If you’re happy to delegate the investment of your money to a professional in a portfolio that already exists, a unit trust will appeal to you. It’s simple and easy, and generally has a low minimum investment. Many unit trusts offer diversified exposure to assets such as equities, bonds and property or are more specialist in their concentrated exposure to a single type of asset or asset class.

You can, however, also invest in a stockbroking account with low minimums if you choose to do it yourself online. 

Unit trusts are a form of collective investment set up under a trust deed

An investment manager will invest your money pooled with that of fellow unit trust investors. There is a trustee in place to safeguard the assets and make sure the investment or fund manager is acting in the best interests of the investors or beneficiaries. The fund is divided into units, and each investor buys one or more of these units. You can sell your units if you decide to invest your money elsewhere. The price for each unit depends on the underlying value of the assets (net asset value, or NAV), and this is usually calculated each day. A unit trust is open-ended. That means the fund will grow and shrink as you buy and sell your units.
 

The size of a stockbroking account depends only on what you invest and the value of the underlying investments

It is also not a legal entity setup under a trust deed. This gives you more direct control, but a little less protection.

How do unit trusts and stockbroking accounts make money?

The unit trust makes returns by investing in well-performing assets, usually company shares, bonds, property funds and other assets. The fund will pay out any quarterly or bi-annual returns as either income or growth, and you can usually decide how you want to receive the money. Remember that returns are not guaranteed, and that you can also lose money.

With an income-focused unit trust, the fund will pay you a regular income in the form of interest income or dividends via what is called an income distribution.

For a growth-focused unit trust, you can choose to reinvest any returns to grow the size of your investment.

With a stockbroking account, your returns are also directly related to the underlying investments, and you are similarly exposed to the potential for markets falls.

What are the different underlying investments that are available?

One of the main decisions you need to make when investing in a unit trust is whether you want it to be actively or passively managed. With an actively managed unit trust, a fund manager will aim to beat the market by buying and selling assets. With a passively managed unit trust, the underlying fund will grow and shrink according to an index (often called tracker or index funds), and the fees tend to be lower because it requires less hands-on management.

Another key choice is how and where the funds are invested. You can choose unit trusts that invest in particular sectors, assets or regions internationally, or those that take a more diversified approach. Some invest in other collective investments, which are called multi-manager or a fund of funds.

With a stockbroking account, you personally choose the underlying investments, or give a professional manager whatever degree of control you’re comfortable with, to decide what to invest in and when. A great advantage of a stockbroking account is that you can borrow against the value of your portfolio.

Advantages of investing in unit trusts and stockbroking accounts

• You can invest small amounts.
  
  
• Whether you choose an actively or passively managed unit trust fund, you don’t manage the underlying assets, but you will need to choose when it is a good idea to buy or sell your units. With a stockbroking account, you decide whether to make each decision to buy or sell yourself, or delegate this to a professional.
  
  
• Diversification – most unit trusts invest in a variety of different assets, helping you diversify your portfolio to hedge against market volatility. With a stockbroking account you won’t necessarily have the same ‘built-in’ diversification, but you can use hedging instruments to offset the risk of specific investments dropping in price or losing value.
  
  
• Liquidity – you can usually sell your units or shares and instruments in a stockbroking account at any time, making it relatively simple to access your money if you need it through either. Unit trusts are much more appropriate if you are investing to be able to withdraw a regular income from your money.

You do need to be mindful that unit trusts and stockbroking accounts are both subject to market risks, specific instrument fluctuations in price, tax and estate duty consequences.
 

Download a more detailed comparison of the 2 investment vehicles.

Diversify your investment portfolio to take advantage of the best of both worlds

Both unit trusts and stockbroking accounts can provide access to local and international investment exposure and opportunities. It is best to seek professional financial advice about which may be better for your needs.

To find out more about our range of unit trusts and how it may be best for you to access a stockbroking account, please contact your Nedbank financial planner. 

Learn more about online share trading .

If you’re not a client yet and want to find out more about how we can help you, we would love to hear from you. Please complete our online contact form , and one of our consultants will call you back.