Investing in Unit Trusts
The secret to financial success
series of articles will provide sound financial advice that stands the
test of time on how to protect and grow your wealth in simple language
for anyone to understand and reach financial freedom and security.
Banks and finance companies can go bankrupt, stock markets can go up
as well as down but the strategies explained in the articles will give
financial literacy for you to take control of your finances away from
institutions. In the first article we said that the secret to financial
success lies in striking a balance between the present and the future
and living within your means.
In the second article we described how to save by setting a financial
goal and having a written financial plan and getting your money to work
for you.This article discusses investing in unit trusts.
What is a Unit Trust?
For a retail investor, or for a seasoned investor, unit trusts offer
a simple and effective way of saving money - they are also the perfect
way to build a balanced and diversified investment portfolio,
particularly if you do not have a substantial amount of money to invest.
These are legal vehicles established to protect investors who pool their
cash in a fund.The fund, in turn, uses this money to buy a portfolio of
What is the difference between a 'closed-ended' fund and an
'open-ended' fund?Open-ended funds are allowed to issue new units and
existing units can be redeemed on demand. As there is no limit to the
fund size, they just become bigger to accommodate demand.
On the flip side, if there are more sellers than buyers, the fund
will become smaller. The price is dependent on the value of the fund's
underlying assets. In Sri Lanka, most unit trusts are open-ended funds.
Closed-ended funds have a ?xed number of issued units and do not
issue new units after the closure of the Initial Public Offer.
Closed-ended funds are traded on an exchange to provide an exit and
entry mechanism for investors who wish to redeem their investment and
enter into the investment respectively.
The traded price of the closed-ended fund will rise and fall
depending on supply and demand for the units, like shares of listed
companies fluctuate with demand and supply, as the supply of units is
Closed-ended funds generally trade around their net asset value or at
a slight discount to the net asset value (NAV) until close to the
maturity of the fund when the trading price begins to converge with the
net asset value of the fund
The operating structure of a unit trust has been designed to
safeguard your money. The Securities Exchange Commission of Sri Lanka
(SEC) regulates unit trusts and requires fund managers to ensure that
their investments are sufficiently liquid and diversified.
The regulations relating to disclosures in prospectuses also require
fund managers to give true and adequate information about the unit trust
to enable investors to make an informed decision about its merits and
Approval by SEC does not guarantee the quality or pro?tability of the
fund. Investors must do their own homework and assess for themselves the
merits and risks of the unit trust before investing. Although a fund
manager makes decisions on your behalf, they do not have access to your
funds. In Sri Lanka, unit trusts are established by a trust deed. The
trust deed is a legal document that sets out the working arrangement
between investors, the fund manager and the trustee.
It spells out the investment objectives of the unit trust, and the
responsibilities of the fund manager and trustee.
The trustee is always independent of the fund manager and acts as the
custodian of the fund assets and ensures that the unit trust is managed
according to the guidelines laid out in the trust deed to minimize the
risk of mismanagement by the fund manager.
All unit trusts have a similar operating structure (see Figure 1) and
therefore, there is no difference between a bank-owned unit trust and
others. There has been no record of any unit trust fund defaulting
payments in the 24-year history of the unit trust industry in Sri Lanka.