What are unit Trusts
It is money committed by investors into financial assets or equity, whereby returns produced are apportioned according to money invested. The fund is managed by an asset management company licensed by the Finance Ministry, according to each fund’s investment policy and objectives which in turn must also receive endorsement by the Securities and Exchange Commission (SEC). The asset management company will have fund prospectuses available to investors which provide information on the fund which they could review before making a decision to invest. The fund would appoint a Trustee, not associated with the asset management company, to represent the unitholders and protect their interests. A Registrar handles the records of unitholders and their benefits, while an accredited auditor reviews the accounts and assets of the fund.
Unitholders can therefore be assured that money invested in the fund is deployed as stated in the investment policy and objectives of the fund outlined in the prospectus. This ensures the unitholders’ aims are being matched and optimizes the returns that is expected from picking the chosen fund. Additionally, the fund itself is a legal entity separate from the asset management company.
Risks to the Investor
Most investors tend to view risks as mostly involving potential losses on the principal amount invested. But there are other types of risks as well and all types of investments contain a certain amount of risk, although in varying degrees. Investments with higher risks tend to offer the attraction of better returns. Likewise, those with lower risks will normally provide lower returns.
Main Types of Investment Risks Include
Risks Stemming from External Factors (Pervasive Risk)
Risks caused by external factors are uncontrollable and would include factors such as economic conditions, political environment, or changes in interest rates.
Risks Involving the Underlying Company (Company Risk)
Share price of companies may be affected by issues specific to the company such as financial performance or by changes to the overall business climate of that industry.
Credit Risk or Default Risk
Is the financial ability of the company issuing the debt instrument to meet interest payment obligations as well as the principal amount when the debt is due. Any inability to meet payment schedules may cause losses to the fund which has invested in the debt instrument.
Interest Rate Risk
Interest rate risks are caused by changes in prevailing interest rates in the market which may subsequently impact the price of the debt instrument. When market rates fall, the prices of bonds or debentures have a tendency to increase. Similary, increases in market rates have the effect of depressing bond or debenture prices. For example when prevailing interest rates in the market rises, a seller wishing to offer bonds and debentures for sale would need to lower the selling price in order to offer an attractive yield commensurate with recent rises in market interest rates. As such, a loss occurs.
Income Risk
Income risk refers to the potential for income or returns to fall, if market interest rates decline and money was placed in bank deposits or promissory notes. This does not affect the value of the principal.
Liquidity Risk
Liquidity risk refers to the ease of transacting the securities in the market. Investment in securities with low trading liquidity hinders the ability to sell them when desired as there may be few potential buyers or they may require a lower price.
Country Risk
Investments deployed in any particular country may be impacted by events specific to that country such as appointment of new prime minister, change of policy, etc. which could have a bearing on debt payment obligations or restrict the inflow/outflow of money.
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