a guide to unit trusts

8/7/2019 A Guide to Unit Trusts

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A GUIDE TO UNIT TRUSTS


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CONTENTSo Introduction to Unit Trusts 3

o Unitization 4

o Interpreting Unit Prices 5o Structure of a Unit Trust 6

o Safety of Unit Trust Funds 7

o Benefits of Investing through a Unit Trust 8

o Risks of Investing through a Unit Trust 9

o Types of Unit Trusts in Kenya 10

o Assessing your Investment Needs 11

o Choosing a Suitable Unit Trust 12

o Features of the Zimele Unit Trust Funds 19

o Benefits of saving and investing with Zimele 20

o Frequently asked questions 21


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INTRODUCTION TO UNIT TRUSTSA Unit Trust (also known as a collective investment scheme) is aninvestment alternative which pools money from many individuals and

channels it into various investments with the aim of achieving low risk through diversification and lower average costs per member.

The funds are collectively invested in a portfolio of assets, such as shares,bonds, money market instruments and other authorized securities, in line

with the common objective and needs of the group of investors.Depending on the type of fund, Unit Trust funds earn income in the formof dividends, interest received and capital gains realized from theappreciation of the assets invested in.

In Kenya, Unit Trusts are regulated by the Capital Markets Authority ( www.cma.or.ke) , a corporate body set up in 1989 through an Act of Parliament with the mandate of promoting, regulating and facilitating thedevelopment of orderly, fair and efficient capital markets in Kenya.


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UNITIZATIONUnit Trust funds are valued using the unitization method, the number of units amember receives will depend on the amount of money invested and the prevailing

unit price, less any fees charged.Unit trusts are open-ended investments which means they constantly create andredeem units based on purchases and sales of existing and new members.

The price of each unit is based on the market value of the underlying assets inwhich the Unit Trust funds have been invested, and is calculated at the end of eachbusiness day. The unit price is also called net asset value (NAV).Unit price = (Market value of investments + other assets) Liabilities

Total number of units issued

Each time money is invested, new units are created to match the prevailing unitbuying price for the day. Similarly, each time units are redeemed, the assets soldmatch the prevailing unit selling price. In this way, there is no supply or demandcreated for units and they remain a direct reflection of the underlying assets.


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INTERPRETING UNIT PRICESUnit Trust prices are published in the leading daily newspapers from Tuesday toSaturday. The name of the fund, together with the unit buying and selling price are

indicated in the Business or Financial section of the Newspaper.The difference between the Unit Buy and Sell price represents the specific fundsfees. These are the costs incurred by the Fund Manager in investing the pooledfunds, or rather the payment made by Unit Trust members for the time andexpertise of the Fund Manager in looking after their investments.

The Sell price is the cost an individual incurs when buying units. It reflects theUnit Trusts net asset value (NAV) plus fees and charges.

The Buy price is the amount which a Unit Trust member receives when selling units. It simply reflects the NAV of the fund, which excludes any fees and chargesimposed by the Fund Manager.

Hence, the Sell price is always higher than the Buy price.


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STRUCTURE OF UNIT TRUSTS

Under the requirements of CMA Regulations, Unit Trusts are required to have the following structure:

UNIT TRUST

MEMBERS

CUSTODIAN

Ensures thatmembersinvestments are

safe

FUND

ADMINISTRATOR

Ensures the efficientrunning of the

operationsof the Unit Trust

TRUSTEES

Safeguards the interestsof Unit Trust

membersin relation to

CMA Regulations

FUND

MANAGER

Ensures that the unittrust fundsare investedprudently


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THE SAFETY OF UNIT TRUST FUNDS

The Trustees of the Unit Trust play a key role of protecting the interests of the unit trust

members at all times.

A Fund Administrator oversees the affairs of the Unit Trust, ensuring that they are efficientand legal.

The Funds Custodian looks after the assets of the Unit Trust, namely investments and

money, providing safety.

The Fund Manager is an independent professional company appointed to invest the Unit

Trust funds.

This separation of roles ensures good corporate governance while minimizing operational

risk, thereby enhancing the safety of Unit holders funds.

Moreover, each Unit Trust fund has a specific investment objective and investment

guidelines developed to achieve this objective, which guides the investment activities of the

Fund Manager.


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BENEFITS OF INVESTING THROUGH

A UNIT TRUST1. Diversification: Unit Trusts typically invest in a diversified basket of assets thereby minimizing

investment risk. This generally improves members chances of getting a favourable return.2. Convenience: By investing through a Unit Trust, an investor is able to reduce the time, effort

and paperwork that is associated with managing his/her own investment assets.3. Economies of Scale: Compared to a direct investment in shares or bonds, Unit Trusts offer an

affordable minimum investment amounts and through the pooling of members funds, the costsincurred are lower.

4. Professional Management: Unit Trust funds are managed by professionals whose investmentdecisions are typically based on extensive knowledge and research of market conditions.

5. Liquidity: An investor has the flexibility to convert his investment into cash whenever the needarises. In addition, Unit Trust members are allowed to transfer money from one fund to anotherat no extra charge.

6. Divisibility: Unlike other assets such as houses and cars which cannot be apportioned , units canbe redeemed in part or full.

7. Access:Through Unit Trusts, small investors are able to invest in a broad range of investments.8. Choice :A range of Unit Trusts are availble to investors to enable proper matching of each

indivuduals unique risk and return profile.9. Regulatory protection : The industry is regulated by the Capital Markets Authority (CMA).


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RISKS OF INVESTING THROUGH A

UNIT TRUSTa. Market risk: Unexpected economic, political and other conditions may occur, resulting in a

negative impact on investment returns either in a particular asset class or in the local macro-environment in general.This risk applies to all investments in general, and not only to Unit

Trusts.b. Security risk: The returns of a particular investment, such as those from shares, bonds, or otherfinancial instruments, are highly affected by the performance of the issuer, such as a corporatebody. Generally, Treasury instruments are viewed as zero-risk, given that they are guaranteed by the government.

c. Currency risk: For Unit Trusts which invest in international markets, there is a chance that the

value of specific foreign currencies, in which their investments may be denominated, may fall invalue, hence having a negative impact on investment returns.d. Management risk: Unit holders rely on the Fund Manager to manage their funds in their

interests and to make appropriate investment decisions, under the watchful eye of the Trustee.Hence, the returns made by the Unit Trust depend on the managers skills, experience andefficiency.

One way of reducing the risks associated with investing is diversification, either within the UnitTrust or as an individual with money in different Unit Trusts. Different investments tend toperform well at different times, so by having funds in different investments, poor performanceby any one investment will be compensated by better performance of other investments.


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ASSESSING YOUR INVESTMENT

NEEDSThe choice of where to set your savings aside for future spending and how to invest dependson various factors, all of which must be considered before you do so.

1. Financial objectives : You need to set out what you want to achieve, in terms of yourfinancial goals.

2. Investment horizon : Evaluate the amount of time you have to put aside money for yourdesired financial objectives. How long do you have until you need the money to meet yourneeds?

3. Risk tolerance : Assess how much risk you are willing to tolerate, bearing in mind thetrade-off between risk and return. Establish what level of returns you want to get and if the risk that comes with those returns is worth it.

4. Volatility : Depending on the Unit Trusts investment objective, your returns may bevolatile due to the assets your money is invested in. You need to consider whether you cancope financially with fluctuations in Unit Trust prices.

5. Affordability : Different Unit Trusts will have varying minimum amounts which you canbegin to save and invest, as well as frequencies in which you will need to make payments.Therefore you need to consider how well this fits into your budget.

An investor can develop an investment portfolio based on personal characteristics as shownin the following slides.


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DEFENSIVE INVESTOR

This investor eliminates all investment volatility in favor of guaranteed securities. Thegoal of this investor is to protect capital, using safe investments which give a definitereturn. A Money Market Fund is recommended for this type of investor as well as forinvestors with short term objectives.

Money Market Fund 100%


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MODERATELY CONSERVATIVEINVESTORSThese investors are comfortable with price volatility and are willing to accept the possiblemodest losses in capital value in the medium-term. Over the long-term, they expect theirassets to provide sufficient returns to exceed inflation. A combination of 60% Money MarketFund and 40% Balanced Fund is recommended.

MODERATELY CONSERVATIVEINVESTORSThese investors are comfortable with price volatility and are willing to accept the possiblemodest losses in capital value in the medium-term. Over the long-term, they expect theirassets to provide sufficient returns to exceed inflation. A combination of 60% Money MarketFund and 40% Balanced Fund is recommended.

Balanced Fund 40%



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MODERATELY AGGRESSIVEINVESTORSThey seek a higher level of capital growth through aggressive investments such as a BalancedFund. However, this growth may be balanced by investing in a Money Market Fund in orderto manage the volatility of their total portfolio. High medium to long term returns areachievable with this approach. A combination of 40% Money Market Fund and 60%BalancedFund is recommended.

Balanced Fund 60%



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ASSERTIVE INVESTORSThey are willing to accept a higher level of price volatility when seeking returns. Although,

they tend to hold a modest level of low risk assets such as a Money Market Fund to smoothyear to-year returns. A combination of 80% Balanced Fund and 20% Money Market Fund isrecommended.

Balanced Fund 80%



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FEATURES OF THE ZIMELE UNIT

TRUST FUNDSZIMELE

UNIT TRUST

ZIMELE

BALANCED FUNDFunds are invested in shares of listedcompanies and interest-earning assets

such as Treasury bonds andCommercial Paper.

The Fund seeks to attain capitalgains over time.

ZIMELE MONEY

MARKET FUND

Funds are invested in interest-bearing investments such as Treasury securities

and Commercial Paper.

The Fund aims to preserve the value of capital invested while generating income.


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BENEFITS OF SAVING AND

INVESTING WITH ZIMELE1. You may contribute a minimum amount of Ksh.500, and the amount and frequency

thereafter is flexible.

2. You can join as an individual, with a friend or as a group.3. Your money will be pooled together with other members contributions and spread across a

wide range of investments, thereby increasing your chances of obtaining good returns atlower risk.

4. You will only be charged 2% per annum for management fees on the Zimele Balanced

Fund, with no hidden charges or fees.5. Your money will be professionally managed by qualified fund managers who are trained to

make investments that can deliver good investment returns.6. You may conveniently send your contributions through M-PESA Business Number 501101

if you want to save with the Zimele Money Market Fund.

7. You will have free access to an online statement through which you can view details of yourinvestment.

8. Your withdrawals will be processed within a short period of time and the money will be sentto your bank account.


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FREQUENTLY ASKED QUESTIONS

Q. How can I monitor returns in a Balanced Fund?A. A Balanced Fund operates in terms of the number of units one has. The market value of ones

units depends on the current price of the unit at a particular period of time. For example, onemay have purchased 1,000 units at a price of Kshs.5. If the price appreciates after a certainperiod of time to Kshs.11, this means that the value of their units becomes Kshs.11,000.

Q. Do Unit Trusts re-invest dividends and capital gains?A. Yes, the fund manager often tries to maximize returns by reinvesting returns.Q. Do I have to invest monthly in Unit Trust?A. Not necessarily. For the Zimele Unit Trusts, contributions are flexible in that you can

contribute any amount at any frequency.Q. When is the best time to buy the units?A. There is no particular best time to buy the units when one is either saving or investing long-

term.Q. Do I have to indicate in advance how long I intend to be a member of a Unit Trust?A. It depends on the Terms and Conditions of the particular Unit Trust, but one does not have to

sign anywhere indicating how long they will be staying in the Unit Trust.


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The information contained in this Guide is provided in good faith and is derived from sources believed to be accurateand reliable at the time of its publication. It is, however, only provided on a general basis only and does not constitutea recommendation. For specific information and advice about your investments, please visit, call or email us.

Zimele Asset Management Company Ltd7th Floor, Ecobank Towers

P. O. Box 76528-00508 Yaya, Nairobi.Tel: 254-2-2246273

e-mail: [email protected]: www.zimele.co.ke

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