Unit Trusts, the beginner’s charm

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19 May 2020

Unit Trusts, the beginner’s charm

If you know me, you know that I am a strong advocate for the creation of sustainable generational wealth and keeping your money in the bank is definitely no way to create wealth. Money stashed in the bank doesn’t benefit you unless it’s pays you interest higher than inflation in the worst case scenario. The sad reality is that most banking products are not even decent enough to pay that. So you must ask yourself, do you really crave safety at the expense of growth. So while you save and are safe, your purchasing power is eroded.

This brings me to one of my favorite topics, unit trusts! Depending on your jurisdiction, they can be called collective investment schemes or mutual funds. Unit trusts are the simplest way to get started with your wealth creation process because they allow you to outsource the expertise of professional fund or investment managers to create value for you by investing in any of the asset classes, namely shares, property, bonds or money market instruments.

So how do they really work? Imagine a farmer who has a funnel which is directed on top of a huge can. The funnel is used to channel water into the can which in turn is then used to water a vegetable garden. The garden can have either one type of crop or several different ones. In the case of a unit trust the, fund or investment manager would typically be the farmer. Just as a farmer can decide to specialise in one type of crop such as maize or rice, a fund manager can also decide to specialize in one asset class or a blend. Now as an investor, the money you contribute to the fund would be similar to the water that gets channeled into the funnel. Different funds have different minimum investment options so I could bring R1 000 000 whilst someone else could bring R500. The water could be poured from 20l buckets or 50ml bottles, at the end of the day, it all goes into the can. The can in this instance represents the fund. Once the money hits the fund, each investor gets allocated units in the fund based on how much they have invested. The good farmer then uses the can to water his garden in order to produce a healthy harvest. In the same way, the fund manager takes the money and invests it in various asset classes with the hope of producing good returns for his investors. It is the farmers responsibility to make sure, the crop gets enough fertilizer, sprayed to kill any insecticides or that any weeds are removed to facilitate the best yield possible. In the same way fund managers have to look for the best investment opportunities to help his investors grow their money. At the time of harvesting, those who buy the farmer’s crop get as much satisfaction from eating it as he does though they never lifted a finger to sow, till or reap. That’s the power of outsourcing even with your investments through unit trusts! So now, if you’re just starting your investment journey, you have no more excuses in being an investor rather than a saver.

 

https://momsandmoney.org/index.php/2020/05/19/investment-lessons-from-a-waffle-making-expedition/

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