Investments can be confusing because there are so many options to choose from. One way to reduce this complexity is to consider investing in unit trusts, which are essentially pre-configured investment funds. They’re a popular investment option, because they’re compiled and managed by professional investment managers but are accessible to everyone.

Your unit trust contributions are pooled with the contributions from all other members of the fund, which is why unit trust funds are also known as collective investment schemes. There are more than 1,700 local funds and nearly 800 focused on offshore investments. Because you’re saving collectively, you own units in the fund rather than shares directly in the companies in which the fund has invested.
 

What kind of unit trusts are available?

A unit trust fund can be based on just about any type of investment asset. Some funds are made up of locally listed shares only, while other focus on international stock markets. Some invest only in tech shares, or financial stocks, or companies that are good dividend payers. But you can also get a more balanced fund that holds a mix of shares, property investments and safer assets like cash and bonds.

There are so many options available because investment companies want to offer a selection of funds that cater to different risk profiles. They structure each fund with the type of assets and investments that they believe will deliver positive results for their clients over the long term.

It’s best to consult with a financial advisor who is qualified to offer investment advice to figure out which fund is best for you. It also helps to do some research of your own, which you can do by inspecting the fund fact sheet that investment managers publish for all their funds.
 

How to find the right unit trust

When researching unit trust funds, you’re unlikely to find a one-size-fits-all solution that combines great growth potential and zero risk. It makes more sense to invest in a mix of unit trusts that diversify your risk by being vested in different asset types with differing risk profiles.

You’ll see unit trust funds listed as low-, medium- or high-risk. These risk profiles are designated by the fund managers to offer investors aggressive growth (high risk), a more conservative approach (low risk) or a well-diversified fund with a spread of different asset types (medium risk).

High-risk unit trust funds will have a heavier weighting to growth assets, like listed shares. However, not all shares are as risky as others. The tech giants, for instance, are expected to grow strongly into the future as we become even more reliant on technology. But despite the promise of growth, it’s not guaranteed that these companies will all survive, which raises their risk rating. The rating for a more dependable, well-established company like a car brand or large food maker would be lower, but still higher than more conservative investments like bonds or even property.

So, not all high-risk funds are the same – you can’t simply look up high-risk unit trust funds and blindly choose one. Take the time to read through the fund fact sheets, so you understand the fund’s goals, strategy, investments and past performance.

But how much risk should you be taking? To answer this question, you should consider how much risk it’s appropriate to take on, according to how long you intend to stay invested.
 

The link between risk and investment length

One of the reasons that stock market investments are so popular is that historical data shows us that you will make money over the long term. In the investment world, ‘long term’ refers to 5 or more years, although you will see best results over 10, 20, or more years.

A balanced portfolio of investments gives you the best chance of riding out market ups and downs, which is the beauty of unit trusts: you can build up a balanced portfolio made up of funds with differing risk profiles.

When you’re younger, you might choose to have a higher percentage of growth funds that you can eventually switch over to lower-risk funds as you get closer to retirement. With so many options at your disposal starting from as little as R250 a month, it’s clear why unit trusts form part of any well-diversified investment portfolio.

Are you looking to get the most out of your retirement savings and need to reconsider your strategy? Speak to one of our financial advisors. Nedbank has a range of unit trust funds available to investors, each managed by experts in the field. Learn more here.