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Oran Hall | How to invest in unit trusts

Published:Friday | July 14, 2017 | 12:00 AM

QUESTION: I am currently going to start university. I am seeking your advice on opening a unit trust account. I am not familiar with all the terms of investment and business, but I am interested in investing, Any advice for someone who is a beginner in the investment world, especially one with little to no background in investing?

- Lacian

FINANCIAL ADVISER: Before opening an account with a unit trust in order to commence investing, it is important to learn some basic things about unit trusts and to be clear about your own objectives.

There are six unit trusts in Jamaica offering a wide range of choices through their 47 funds or investment portfolios. Each portfolio individually or jointly with other portfolios may meet the investment objectives of investors.

To determine your objectives, you should know why you want to invest. If you are primarily interested in strong growth or appreciation, especially over the long-term, you should find capital growth funds, which invest in equities and real estate attractive. These offer a good hedge against inflation.

If you want a steadier increase in the value of your investment with less risk, you should pay attention to money market and bond funds. Money market funds generally invest in short-term fixed-income securities, and bond funds invest in long-term fixed income and variable rate interest-earning securities.

Blended or balanced funds invest in securities capable of appreciating in value and interest-earning securities, but it is worth knowing that no fund is likely to be invested fully in one type of security. Capital growth funds may include interest-bearing securities, for example.

Some funds invest in securities denominated in foreign currencies thus giving a hedge against depreciation in the value of the Jamaican dollar.

Unit trusts do not generally distribute income. The income earned is generally reinvested, thus facilitating the increase in the value of the funds and the unit values. But there are a few funds that do distribute income, thus facilitating a flow of income to the investor.

It is important to consider risk when making any kind of investment, including unit trusts. Risk primarily refers to the variation of the return on an investment instrument or portfolio from an expected return. High-risk instruments thus tend to fluctuate in price. Low-risk instruments tend to experience very little fluctuation in their price movements.

Diversification is a very effective tool in reducing risk. Individual funds - depending on their type - invest in several instruments of the same type or in several different types of investment vehicles. Diversification can also be achieved by investing in several funds.

Unit trusts also make it easier for investors to access the markets because they are constantly creating new units and selling them to the public, but they also constantly redeem units. Such unit trusts are described as being open-ended. They use the funds raised from selling units to invest in the various investment instruments.

Periodically, the value of all the instruments in a fund is computed. The various expenses of the fund are subtracted to arrive at the net asset value, which is then divided by the number of units in the fund to arrive at the net asset value per unit.

Some unit trusts sell the units at the net asset value per unit and also buy back units at the net asset value per unit but usually set a minimum time for which investors should hold the units for that to apply.

But there are cases in which there are two prices: the bid price and the offer or ask price. The unit trusts buy back and cancel units at the bid price or the net asset value per unit. On the other hand, they sell units at the offer price, which is the net asset value per unit plus a selling charge.

One significant advantage of unit trusts is the liquidity of the units, which means that they can be converted to cash quite easily and without significant risk of losing their value.

With a basic understanding of unit trusts and why you want to invest in them, you can take your research beyond the investment instrument to researching the unit trusts themselves to select which you want to establish a relationship with.

When you go to open an account, you will generally be required to provide valid identification, your TRN, two references, proof of address, and a completed and signed client agreement form.

I commend you for deciding to start investing when you are young. You do not need much money to begin, and the unit trust is very suitable for inexperienced investors and investors who do not have the time to manage their investments closely.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com