A Unit Trust Fund is a trust which pools money from like-minded investors and invests in a diversified portfolio of securities. The pool of money thus collected is then invested by the Asset Management Company (AMC) in different types of securities. These could include shares, debentures, Treasury and Money Market instruments, based on the investment objective of a particular scheme. Such objectiv
e is clearly laid down in the Prospectus of that scheme. The fund generates the income for the investors by way of dividend, interest and capital gains. This is distributed to the unitholders in proportion to the number of units they own.
2. What is an Asset Management Company (AMC)? The main responsibility of an AMC is to manage the funds' investments according its objectives. It also is involved in the daily administration and selling units to investors and cancelling units when investors divest them. An asset management company is promoted by a sponsor which usually is a reputed corporate entity with sound record of profits. An AMC typically has three departments:
Fund Management
Sales & Marketing
Operations & Accounting
Eg. Asset Management Company for Ceybank Unit Trust Funds is The Unit Trust Management Company (Private) Limited
3. Trustee
They are an institution independent from managers who monitor the manager's conformance with the trust deed and regulatory requirements. They also create and cancel units at the request of managers, have custody of trust assets and also ensure registration of unit/shareholder. Bank of Ceylon is the Trustee for Ceybank Unit Trust Funds
4. What are the different types of Unit Trust Fund schemes ? Unit Trust Fund schemes can be classified as follows:
By Structure
Open-end funds : An Open-end Fund is one that is available for subscription on an ongoing basis. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. Closed-end funds : A fund which has a fixed maturity. Investors can only invest during the initial offer period (IPO)
By Investment Objective
Growth Funds : The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their funds in equities. Growth schemes are ideal for investors who have a long term outlook and are seeking growth over a period of time. Balanced Funds : The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their Prospectus. These are ideal for investors looking for a combination of income and moderate growth. Income Funds : The main aim of income funds is to provide current income at low levels of risk. The funds are suitable for investors who require a regular income.
5. It is a document which provides investors with important information about the fund. Investors should read it carefully before investing. A prospectus contains descriptions of:
Nature of the Fund
Fees and charges
Investment Objective of the Fund
The AMC and Trustee
Investment Strategies and Restrictions
Risk Factors and Description
Investment Management and Compensation
Dividend Distributions
Rights of the Unitholder
Other Services
6. What is the Net Asset Value (NAV) ? The net asset value (NAV) is the market value of the Fund's assets net of all costs. It is calculated at the end of each trading day. The price(value) of a unit is calculated based on the NAV and published daily. Units are bought and sold based on these prices
7. What are Dividends ? A Unit Trust Fund may receive dividend or interest income as well as trading profits from the securities it owns; this income in turn is distributed to unitholders as dividend. Most open-end Funds offer an option to purchase additional units with the dividends. Dividends are often made annually.
8. Are investments in Unit Trust Fund units safe ? Different funds have different risk profiles, which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Stock market related investments cannot be termed safe with certainty; they are inherently risky. Investors should chose their fund depending on the amount of the risk they are willing to tolerate.
9. What are the Risks in a Unit Trust Fund ? Equity Funds are open to market risk i.e. there is a possibility that the price of the stocks in which the Fund has invested may decrease. Of course, the prices may also go up, making it possible for the Fund to earn profits
10. What are the benefits of a Unit Trust Fund ? Your money is managed by experienced and skilled professionals
Your investment is automatically diversified over a large number of companies and industries, thus reducing the element of risk
Your money is very liquid - can be withdrawn easily
The potential to provide a good return at appropriate risk levels over the medium to long term is better in a wide range of securities
The costs of research and investing directly in the individual securities are spread over a large corpus and thousands of investors thus minimizing individual share
There is a high degree of transparency in the operation of a Unit Trust Fund, so you can take investment decisions based on more information
You have a choice of schemes to suit your needs
The industry is well regulated with many measures oriented towards investor protection
11. Do Unit Trust Funds Assure Returns ? It is not possible to assure returns in a volatile market
12. How do you make money in a Unit Trust Fund ? Unitholders receive a return on their investment in two ways. Dividends
Appreciation of the unit price
13. What are the Tax Benefits for investing in Unit Trust Funds? Both dividend and capital gains are exempt from tax.
14. Who should invest in Unit Trust Funds ? Unit Trust Funds can meet the investment objectives of almost all types of investors. Younger investors who can take some risk while aiming for substantial growth of capital in the long term will find Growth Schemes (i.e. Funds which invest in stocks) an ideal option
Older investors who are risk-averse and prefer a steady income in the medium term can invest in Balanced Schemes (i.e. funds which invest in Stocks and Money market instruments). Investors in middle age can allocate their savings between Income Funds and Growth Funds and achieve both income and capital growth.
15. Are Unit Trust Fund schemes suitable for small investors ? Unit Trust Funds are meant for small investors. The prime reason is that successful investments in financial markets require careful analysis which is not possible for a small investor. Unit Trust Funds are usually equipped to carry out thorough analysis and can provide superior return.
