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Making money from unit trusts

Published:Sunday | April 22, 2012 | 12:00 AM

Oran A. Hall, Contributor

Bob asked you about investing his funds. You gave him some very broad instruments he could consider investing in. I thought he needed some concrete and specific recommendations. Can you say how you can make money by investing in unit trusts?

- R. Manning

The most common way to make money from unit trusts is by selling the units at a higher price than the purchase price. Capital appreciation and income in the form of interest, dividends, or rent cause unit values to increase. In some cases, though, unit trusts that invest primarily in interest-bearing securities distribute income to unitholders.

Unit trusts use the money derived from the sale of units to invest in securities and other investment assets, which collectively are called investment portfolios or investment funds. They generally value the funds daily or weekly.

The valuation takes into account changes in the market value of the assets of each fund and income earned between the previous and current valuation dates. Certain charges are then deducted and the result is divided by the number of units to arrive at the net asset value per unit.

In some cases, the net asset value serves as both the buying and selling price of the units, but some companies require investors to hold units for a minimum period for this to hold.

In other cases, the unit trust quotes two prices for the units - the bid and the offer price. The bid is equivalent to the net asset value per unit. The offer price is arrived at by adding a sales charge to the bid price. It varies from company to company but may be as high as four per cent.

Unit trusts sell their units at the offer price and buy at the bid price. The investor can only realise a gain when the bid price exceeds the price at which the units were bought.

Stock prices fluctuate and so do real estate values. Except in the case of very short-term securities, the values of fixed-income securities may fluctuate as interest rates change. These price movements naturally affect the values of unit trust units.

Not likely to lose value

It is hardly likely, though, that funds that invest heavily in short-term interest-earning securities, or money-market securities, will lose value.

There are four unit trusts in Jamaica. Investors are able to select from 13 funds. Capital and Credit Fund Managers Ltd has three funds. The Income and Growth Fund invests primarily in ordinary stock but also in fixed income securities.

The Giltedge Fund invests in Government of Jamaica long-term and short-term interest-earning securities and the Optimum Capital Fund invests in stock, commercial real estate and fixed-income securities.

Scotia Investments Unit Trust has three funds. Its Premium Money-Market Fund invests in money-market securities, as its name suggests. Income earned may either be automatically reinvested in new units or deposited into the investor's Scotia account.

The Premium Fixed Income Fund invests in short-term and long term Government of Jamaica securities and local and overseas bonds, certificates of deposit and commercial paper, while the Premium Growth Fund invests in local and regional stocks and money-market securities.

Barita Unit Trust has two funds. The Money Market Fund invests primarily in long-term and short-term Government of Jamaica securities, while the Capital Growth Fund invests primarily in ordinary stock but also in fixed-interest securities.

Liquidity and protection

Capital growth funds do not put all of their funds in stock or real estate; they also invest in interest- bearing securities to give them some liquidity and some level of protection in declining real estate and stock markets.

Pan Caribbean Unit Trust offers a suite of five funds. The Sigma Optima Fund invests in regional equities, the Sigma Liberty Fund invests in Jamaican dollar and US dollar debt instruments issued by the Government of Jamaica, while the Sigma Solutions Fund invests in Jamaican dollar fixed income securities.

Its two newest funds are the Sigma Corporate Fund, which invests in corporate debt instruments issued on the local, regional and international markets and the Sigma Venture Fund, which invests in venture capital companies and emerging and growth-oriented companies based in the Caribbean.

Although the gains on capital growth units are not taxed, the returns on units in money-market and fixed-income funds are taxed unless they are held for five years.

There are funds to satisfy a variety of investment objectives: preservation of capital, capital growth, income, exchange rate hedge, liquidity, ease of management, tax minimisation and, you will notice, some are diversified by type of security and by market.

Treat them primarily as long- term instruments and not trading instruments.

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