Choosing the right Unit Trust

As investors seek to make good of their investments in times of uncertainty, how one chooses an investment can make or break a good investment plan.Currently we are seeing a pretty robust and active local equity market with many stocks trading at low Price/Earnings ratios and well below their book values. There is no doubt that it is a good time for an investor to have their portfolio exposed in these and other market. But many persons are still not comfortable with the risks associated with equities and may have no clue as to how to choose the right stock.It is for that very reason why collective investment schemes have become so popular.

One of the well-known collective schemes are Unit Trusts which offer a number of benefits to the Jamaican investor. The Unit Trust provides a great level of diversification to a portfolio, where the investor has instant holdings in several different companies and asset classes, giving a level of stability to your investment. These units are also managed by experienced and competent investment managers whose primary function is to make the fund grow and perform. Unit Trusts also offer investors tax benefits for equity funds and a level of liquidity where units can be converted into cash upon your request, once the minimum holding period is achieved.

Presently in Jamaica, nine investment houses who offer Unit trust to the public of which Barita Investments Ltd. is included. However, with the recent lifting of the Unit Trust moratorium and obvious benefits collective investment schemes have to offer many other investment houses will be seeking to ride the ‘Unit Trust Train’. So with the number of Unit trusts out there and the ones that will inevitably come, trying to choose a fund that will beat the market may prove to be extraordinarily difficult for the average investor. Studies show that selecting unit trusts on the basis of past performance alone is not the best approach, since past performance really isn’t an indication of future results. It is also easy for an investor to be drawn to the most marketing driven fund that claims to be the ‘best’, but may not suit your investment needs. Therefore, it is my goal in this article to direct my readers to some key questions to ask that will help improve your chances of finding a fund that holds some promise of outperforming the market.


What is the fund’s investment policy? 

The investment policy of a unit trust basically outlines the objectives & goals of the fund and states what asset classes the fund can and can’t invest in. It is important for you to identify a fund whose investing strategy better complements your personal financial goals.


What is the track record of the fund?

As I mentioned before, past performance is not an indication of future returns but you should be interested in a fund with long-term sustained success. You are not just looking for a fund that shows good returns on the whole, but ones that do so on a consistent basis in both buoyant and sluggish markets.


What is the experience of the Fund Manager?

The reality is it’s not about the ‘brand’ of the fund itself but about who is selecting the investments. The Fund Manager who could be an individual or a group of persons is responsible for implementing the fund’s investing strategy and managing its portfolio trading activities. As such, it is important to know that the individual has the necessary academic qualifications and professional experience in order to make wise and profitable investment decisions on behalf of the fund.


What is the cost structure?

With this question you want to know the fees charged by the fund, including the management fee, the administrative costs, load fees, and other operating expenses. It costs to have someone manage your money but you want to make sure that the fees are as low as possible. This is especially important if the fund’s performance lags its index and peers over time, since those high fees could eat into your returns over time.

Most of the information regarding the investment policy, fund manager, cost structure etc. is available in the Unit Trust’s trust deed and offering circular. By law all investment houses must give their potential clients an Offering Circular which is basically a summary of the Trust Deed. As such, it is imperative that you read thoroughly the offering circular of the funds you are thinking of before making your final purchase. I am sure if you keep the above questions in mind it will become relatively easy to research and find a good unit trust fund. Do your homework and your returns can reflect your efforts and remember that wealth creation and management requires long-term commitment.

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