Investing in the Stock Market. What is Unit Trust?
So far in this article series we discussed about how an individual
can invest in the Stock Market by purchasing securities of listed
companies. In this article we would be explaining means of how
individuals can invest in the Stock Market indirectly via Unit Trust
Funds.
The Unit Trusts also referred as Mutual Fund has a long and a
successful history in many countries.
In Sri Lanka the first Unit Trust was commissioned in December 1991
followed by seventeen funds managed by five unit trust management
companies over the years. These five management companies are licensed
by the Securities and Exchange Commission of Sri Lanka (SEC) to launch
and manage unit trust funds.
These licensed Management Companies over time have gained market
experience and performance track record in managing the unit trust
funds.
The type of funds initially offered is open ended type of funds and
belongs to income, balanced, growth and index categories. Investors in
open ended funds can invest and withdraw on a daily basis through the
management company. To facilitate the investor transactions, the
management company publishes the selling and buying prices of the units
based on the marked to market values of the investment portfolio.
More recently closed end funds were launched with 2 5 year maturities
comprising fixed income and listed shares in their respective investment
portfolios.
Pure fixed income closed end funds have lower risks compared to the
higher risk share investment funds.
Unless the management company provided a redemption window in the
scheme, the investors in the closed end funds need to wait until the
maturity dates to get back their capital invested. Majority of these
schemes pay regular dividends to the investors to generate an income
during the life time of the scheme.
In September 2009, the industry launched a listed 10 year closed end
fund to facilitate common investors to participate in the listed share
market and to participate in the growth prospects of the stock market
and the underlying companies.
Investors in this type of closed end funds can expect to receive
dividends and also have the option to sell the units through the stock
market intermediaries.
Moreover, the open ended schemes enable the public to open an account
with a licensed management company initially with a small sum of money
or with a lump sum.
Depending on the terms of each fund the minimum amount would vary
between Rs. 1,000/- and Rs. 10,000/- . Once an investment account is
opened, the investor can continue to save as low as Rs.1000/- on a
regular basis.
Prospective investors should contact a licensed Fund Management
Company (FMC) as to their specific procedures for investment in the
funds managed by them. Some of the companies offer switching facilities
to move into other funds managed by them.
The switching facility is limited to other open ended funds.
It is important to differentiate between income and equity type of
Funds.
The income funds generally pays a dividend and most or all of its
money is invested in fixed income instruments such as government and
corporate securities.
By nature these instruments gives interest income periodically and
the Fund distributes them as dividends.
The equity balanced funds invests in both shares and fixed income
securities. These investments generate income from interest, dividends
and capital gains from value appreciation from the share investments.
Over a period the investor can expect both regular dividends and
potential growth of capital from this fund.
Moreover equity growth funds invest mainly in growth oriented shares
and the investors can expect growth in value of their capital from its
share investments. Similarly the indexed funds also invest in equities
that represent a specific index.
This fund also enables capital growth from its share investments as
in the case of a growth fund.
Investors can take advantage from these funds by selecting one or
some of these funds to build a diversified investment portfolio to suit
their specific financial circumstances.
This approach is useful to build savings for unforeseen future needs
for large sums of cash to pay hospital bills, childrens education and
retirement needs.
If you have difficulties in identifying suitable funds you should
speak to the advisors at the Fund Management Companies to clearly
understand the fund parameters in your selection process.
It is also important to realize the comparative tax advantage in unit
investments that corporate investors can get against other financial
products available to them.
The corporate investors will be liable on interest income at a rate
of 35% in the coming year of assessment.
The unit trusts investments have many advantages namely professional
management backed by a research team, provides instant diversification
thus reducing the risk of investments, convenient administration
reducing paper work, offers higher return potential, liquidity: in open
ended schemes units can be cashed at net asset related prices,
transparency where investors get regular information on the fund's
performance and assets held from time to time.
Further unit trusts offers choice of funds to suit your varying needs
and the funds are well regulated by the Securities and Exchange
Commission of Sri Lanka.
In any Unit Trust the investor's money should be transferred to the
Trustee in accordance with the trust deed and Trustee keeps all money
received separately for the beneficial interest of the investor.
Once this money is invested Trustees effect payment and receive
necessary security and keep under their custody and this process
continues until the investor withdraws the investment. Managers keep
necessary liquidity to meet these payments.
In Sri Lanka all Trustee and custodian is a Bank and mandated to
ensure safe keeping of investors assets in the Trust.
Moreover, Unit trusts are tax efficient and only liable to pay 10% on
interest income and dividend income. Gains from sale of listed shares
are exempted from this 10% but liable to pay share transaction levy at
contract level as any other share investor.
The investor is exempted from tax on dividend income and the fund
management company is exempted from deducting the withholding tax on
dividends paid to an investor.
Moreover, the stamp duty is waived on issue of units with effect from
1st January 2007. The investors however should consult their tax
advisors before their investments in units. The Unit Trust Association
of Sri Lanka is an apex body of all licensed Fund management Companies
in Sri Lanka.
Source: CSE and Unit Trust Association of Sri Lanka
|