Pre-script: I’m reposting a series of posts from a few years back on Unit Trusts. There are four. This is the first.
So let’s say that you accept the following:
- Small changes have exponential impact (Have you really done the math? #SavingsAreImportant); and
- The best way to save involves committing to the saving in advance, just before you get a raise, via debit order (The psychology of savings)
And maybe you’d like to put some of that into practice, so you’re setting aside some money every month, meaning that you’d like to put it somewhere. You have some options:
- Invest directly yourself; or
- Get someone to invest it for you.
It’s the second part that I’m going to talk about here, because (if we’re honest) that’s the one that has the least amount of admin attached. We must be pragmatic – while it would be nice to be the finance guru that pays attention to markets and risk factors, most of us would rather just watch Game of Thrones and drink wine.
That said, even if you’re happy to let someone else make the day-to-day investment decisions, you still have to make some kind of an investment decision initially. And here are some options you’ll have to choose between:
- Call Deposits at your bank;
- Unit Trusts;
- Exchange-Traded Funds.
Call Deposits are easy. Too easy. You should only be putting your money into a call deposit if it belongs to someone else (like a renter’s deposit), or you need the money to free up in a few months (for a downpayment or something). Otherwise, you’re just making yourself feel good about the decision that you’re not making. That is: if you’re going to save the money long-term, then you should commit to that and put it into an investment that makes sense.
Which brings me to Unit Trusts (UTs) and Exchange-Traded Funds (ETFs). They’re almost the same thing – but because I can, I’m going to leave ETFs for a later post.
What is a Unit Trust
Shares are expensive to buy if you’re only buying a few at a time; as are bonds and commodity futures, and most things actually. Not just because you have to buy in big batches, but also because there are high transaction costs (like broker commissions) for every purchase/sale you make.
As a result, in the early days, the masses tended to keep their savings in houses and call deposits. But this type of untapped market is unbelievably distressing to the finance industry – just think of all those unearned management fees!! So the finance industry invented the Unit Trust (also known as a Collective Investment Scheme).
How a Unit Trust works
- A finance house collects your money, and the money of many others, thereby creating a pool of cash-for-investment (the fund).
- The finance house gives the money to a fund manager.
- The fund manager invests it on all your behalfs.
Finance houses like to talk about unit trusts as “investment products” that you can “buy units in”. So let me clarify: they are selling an “investment product” because the “unit” you buy will be invested in accordance with strict guidelines (known as the investment mandate of the fund). And that mandate is there to prevent you from accusing them of mismanagement if they lose all your money.
It’s why there are so many different unit trusts to choose from – because there are infinite ways of writing the rules around how, when and in what the fund manager can invest your money.
Why You Should Like Unit Trusts
- They accept debit orders.
- They do the investing work for you.
- It’s cheaper than doing it yourself.
- You can start investing small amounts almost immediately (this is actually the best part – with other types of investment, you may need to save up for a bit first!)
The Next Step
There are some things that you should be aware of before you glibly call up your nearest broker and sign up for a debit order. Questions like:
- What type of unit trust do I want (equity, balanced, bond, stable, optimal, money market…)?
- What is the investing style of the finance house managing the fund (conventional, contrarian, passive, active, high risk, low risk…)?
- What size of unit trust am I buying into?
Your answers to those questions should be based on your age, occupation and personality. Which I’ll get to in the next post.
But quite seriously, picking a unit trust is like selecting a spouse. It’s not always costly if you get it wrong – but it will suck if you end up feeling like the guy or girl that settled…