Wed | Jan 23, 2019

The do’s and don’ts of investing in unit trusts

Published:Sunday | February 22, 2015 | 12:00 AM

I am a farmer and I recently joined the NCB Capital Market Fund. I really do not understand much about investments and the hidden terms and conditions that they come with.

I am, however, willing to learn by investing small amounts of money. I would just like to know more about the dos and don'ts because I would really love to grow my current business which is currently doing well and expand to a T-shirt line but, for right now, I am just saving up the little I have and try my hand in a few of these investments. I hope I can learn more and earn more with the experience of others who are qualified.

- Jake

FINANCIAL ADVISER: The offering memorandum, also called the offering circular, is an important source from which to get valuable information on unit trust funds. It is usually quite detailed but contains information which can go a far way in shedding light on how these funds operate. The unit trust managers are generally quite willing to make this document available to investors and prospective investors.

A very important section of the document is that which addresses the investment policy of the fund. It mentions the types of securities in which the fund invests and the investment objectives that it sets out to meet. There is also a section that describes the limits on the investments, for example, it may state that investments can only be made in Government of Jamaica instruments.

The offering memorandum also describes the types of risk associated with the fund, the method of valuing the units, the profile of investors for whom the fund is suitable and the method of issuing and transferring units.

It also identifies the institutions and professionals that relate to the various activities of the fund. This group includes the trustees, managers, auditors, selling agents and bankers. If you wish, as a unit holder, you should be able to obtain a list of the investments held by the fund periodically.

Your inexperience notwithstanding, there are some things that you are doing right: you are investing what you have now without waiting to accumulate a significant sum of money to start, you are prepared to learn about investments gradually and you have chosen an investment instrument that is very suitable for individuals who are new to investments.

Let me point out, though, that there are six NCB CapFunds, which are quite different from each other and are aimed at meeting different investment objectives. The five unit trusts operate over 20 funds. One of the first things you should do is to determine what your objective is and then identify a fund that matches that objective.

Buying units in a fund that is

managed by a strong and reputable company will not help you to the fullest extent possible if the fund is not able to help you meet your investment objectives. You should, therefore, determine if you want capital growth with moderate to high risk, exchange rate protection, income distribution, steady growth with low risk or a balance between high risk and low risk, for example.

Although unit trusts are liquid investment instruments, they are primarily long term even if they invest primarily in money market instruments. You should, therefore, be prepared to maintain your investment over the long term.

Even though most funds tend to be diversified, it is also possible to enhance the diversity of your portfolio by investing in unit trusts operated by different fund managers. It is quite evident that even funds that are quite similar generate wide differences in their performance in the same market environment. With this mind, it is prudent to do some research before making a decision.

You can also build a diversified portfolio by buying into several types of funds operated by the same manager but you should not stray from your objectives. When you know why you are investing, it is easier to remain focused and not be tempted to panic when there are short-term rough patches in the market.

At the same time, avoid spreading your investments so widely that it becomes difficult to monitor them, and to maintain your focus. Time is important and too much diversification offers no guarantee of superior performance.

Know the name of the fund in which you have invested and what its objectives are. Be prepared to ask as many questions as necessary before making a commitment to invest, and continue to ask even after you have made your investment to help you understand how it is faring.

The newspapers publish the performance of the funds but the unit trusts also publish their performance on their website so use the various media to see what is happening with your investment. It is good that you are creating multiple streams of income, as is evident from your other activities. I wish you well.

n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.