Oran A. Hall, Contributor
QUESTION: I am a 22-year-old female and have been thinking about investing. I recently started researching the Scotia Premium Money Market Fund and am wondering if you could give me any advice to find a good fit.
There are four money-market-unit trust funds in Jamaica.
They are similar in many ways but there are a few differences between them. In selecting a fund, you will have to determine what matters to you most and match that against what the funds are offering.
These are some of the ways in which they are similar. They are pooled funds which sell units to the public and then invest such funds in interest-earning securities.
Investors make a return from the increase in the value of the units they purchase. Unit values increase as the funds earn interest which they generally reinvest.
They more or less have the same investment objectives, chief of which are safety of principal, or preservation of capital, and liquidity.
To achieve these objectives, they invest in Government of Jamaica long-term and short-term debt securities, including Treasury bills and repurchase agreements.
These are safe, low-risk instruments which are managed by professional investment managers. The funds also offer some level of diversification.
Unit prices are generally calculated on a daily basis by adding the income earned to the principal sum invested and deducting all charges specified in the trust deed.
The result, the net asset value, is divided by the number of units to determine the price. The Jamaican funds tend to buy and sell units at the same price.
Money-market unit-trust investments qualify as long-term savings accounts if they are held for five years but investment is limited to a maximum of one million dollars per year.
Whereas the one year generally counts as a 365-day period, in the case of the unit trusts, purchases made within a calendar year count for the full year. Therefore, an investor can make a J$1-million investment in December 2012 and then make a similar investment in January 2013.
This is a big advantage for these funds.
Although unit-trust investments are generally liquid, some are more liquid than others. Encashing money- market units within a certain minimum time of purchase - usually 90 days - generally attracts a penalty.
The Scotia Premium Money Market Fund does not penalise early surrender of units but it has a high entry point. It requires investors to make an initial investment of J$350,000 and subsequent investments of J$100,000.
Although funds generally re-invest all interest earned, the Scotia fund distributes income to unitholders thereby adding income as an investment objective. Nevertheless, investors have the option of reinvesting their income distribution through the purchase of new units.
Unitholders who opt to accept a distribution of income from the Scotia fund miss an opportunity to save taxes as their distribution is taxed. In this case, the advantage is with the other funds: Barita Money Market Fund, Capital and Credit Gilt Edge Fund and Sigma Solutions Fixed Income Fund. The funds offer other benefits and conveniences.
Barita, for example, has a facility for units to be purchased through salary deduction.
As much as they generally invest in similar instruments, some funds perform better than others due to differences in policy and management skill. Although past performance is no guarantee of future performance, it does give a peek into how well a particular trust can manage investors' funds.
Get information from the unit trusts on the past performance of the funds. You will find that no fund outperforms the others all the time.
I commend you as a young person for seeing the value of investing and for considering a route that offers so many advantages to the investor.
I suggest that you use every opportunity to learn about how to invest to equip yourself to move on to other forms of investing when you are ready.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial email@example.com