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Advisory Column: An abundance of unit trust options

Published:Friday | April 24, 2015 | 12:23 PM

Investors should not have difficulty finding unit trust funds in which to invest but may have serious difficulty selecting which best suit their needs. They are as diverse as they are many, thus making it difficult to compare them because two funds can only be compared fairly if they are genuinely alike.

There are 25 funds for retail investors. Subscriptions are open for two, and subscriptions will be open for two next month, May, but there is one more fund - the Sigma Real Estate Fund - for which the minimum investment is $500 million.

Safety of principal is a major investment objective being catered to, considering how many of the funds lean towards short-term or long-term interest-bearing securities. But other objectives such as capital growth, exchange rate hedge, and income are also catered to.

Perhaps, though, the objective being catered to the most is tax minimisation, which can be derived from the capital growth funds and the fixed income funds, which invest in a wide range of instruments denominated in the Jamaican dollar and the US dollar.

As Jamaica effectively does not have a capital gains tax, the gains on capital growth funds have always enjoyed tax-free status.

On the other hand, fixed-income funds - money market and long term - yield tax-free benefits to investors to the extent that the requirements of the long-term savings account are met. These include the investment being for five years and the maximum sum invested in a year being $1 million.

The preponderance of fixed-income funds makes debt instruments a favourite. These funds are good when the stock market is going through the doldrums but not so good when the stock market is not slumbering. Some investors will likely switch to capital growth funds as soon as they are satisfied that the stock market has been jolted out of sleep.

Lower-risk funds

Others will not even pay attention to what is happening with the capital growth funds because their low tolerance for risk will keep them wedded to funds invested in the lower-risk interest-bearing securities.

Some funds include securities denominated in foreign currencies, so their performance is boosted when the Jamaican dollar depreciates. But there is another type of risk that this approach addresses in that the performance of such funds is not tied to the behaviour of one national market or a single economy. This is true for both the relevant fixed income funds and capital growth funds.

The funds that distribute income to investors in the form of cash or new units are not able to generate tax-free returns to unit holders because of their regular distribution of income. One principle of long-term savings accounts is that no more than 75 per cent of interest earned can be withdrawn in a calendar year.

The differences in asset mix among even similar funds are manifested in at least two ways: the proportion of the funds invested in each type of security, and the composition of the investment funds themselves, that is, the types of securities in which they invest.

Differences also show in the minimum level of investment required to open an account and to purchase additional units in the future. Additionally, some companies require unit holders to hold units in some funds for a minimum period, usually 90 days.

When units are redeemed before that time, there is generally a cost to the investor. This may take the form of a sales charge being applied, particularly in cases in which just one price is quoted.

In other cases, two unit prices are quoted - the bid and ask - the difference between them being the sales charge. This spread between bid and ask has shrunk over time but still varies from unit trust to unit trust.

Unit trusts, by their very nature, provide significant scope for diversification and effective management of risk not only from the ability of funds to invest in a wide range of securities, but from the ability of investors to invest in several funds offered by the same unit trust and from being able to invest in funds being managed by several fund managers.

In my next column, I will discuss the funds that have been made available to the market by the five unit trusts. In the meanwhile, I encourage investors and prospective investors to take a keen interest in this part of the market. Recent reports of its growth suggest that investors are seeing the value of unit trusts.

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.