Unit trusts: Are they the best bet for first-time investors?

Elizabeth Mwalimo, an investment manager at Orient Asset Managers. [Courtesy, Standard]

When it comes to investments, we are often advised to start the investment journey as early as possible.

In most cases, this is easier said than done, simply because to confidently put money in an investment vehicle, there needs to be an understanding of how it works and be hands-on with its day-to-day running in order to gain returns.

Being a first-time investor can particularly be challenging when it comes to identifying the best investment options. That is why Unit Trusts Funds (UTFs) are a great first-time consideration.

Unit trusts are investment schemes that pool money from various investors and are managed by professional fund managers who invest the pooled money in a portfolio of securities such as stocks, bonds, and other money market instruments or other authorised securities to meet the objectives of the fund.

The pooled money in the unit trusts earns income in the form of dividends, interest income or capital gains, depending on the asset class of the funds invested, such as a money market fund, a fixed income fund, an equity fund, and a balanced fund. UTFs in Kenya are governed and regulated by the Capital Markets Authority (CMA).

Elizabeth Mwalimo, an investment manager at Orient Asset Managers, explains why Unit Trust Funds are favourable for first-time investors:

1. Low investment risk

A unit trust spreads your money across different securities, reducing the chances of you suddenly losing large amounts of money should the markets change.

This reduces the risk of losing your investment through diversity.

You are therefore likely to receive back your starting capital plus interest.

2. Attractive returns

Unit trusts offer considerable returns as compared to traditional investment products or bank deposits and have over time proven themselves to beat inflation. In the long term, returns on some unit trusts will generate returns that are higher, compared to what you can get from traditional saving vehicles.

3. Low capital investment

You do not need a large amount of money to be able to invest in a unit trust. Anyone can have a unit trust fund due to its low capital investment.

Unit trusts are easy to invest in with some having a very low bar of entry, as little as Sh1,000, giving first-time investors a chance to put their money under the watch of a licensed fund manager and custodian as well as a trustee.

4. Flexibility

Unit trusts offer investors great flexibility in terms of how they invest, how long they invest, and for what purposes they invest. As an investor, you have the option to decide the frequency of your contribution and for how long you want to invest your money.

This kind of flexibility reduces pressure, especially during uncertain times. Many unit trust funds allow for liquidation upon request.

5. Investment security

As an investor, you are assured of the fund's security as each fund is supposed to have a trustee who oversees the overall operations of the fund. Despite the risks involved in any investment, unit trusts are well regulated by the Capital Markets Authority (CMA) which puts in place safety guidelines and policies that regulate how money is invested therefore securing your investment.

6. Investment diversification

Remember the saying, 'Do not put all your eggs in one basket?'

This is exactly what investing in unit trusts gives you.

Unit trusts ensure diversification through investment in a variety of asset classes through which they provide an avenue for small-scale and first-time investors to get exposure to a wide range of investments, which would otherwise require one to have a lot of capital to access.

7. Liquidity

UTFs, compared to investing directly in shares often ease the process of buying and selling units of firms.

Additionally, as an investor, you do not have to wait for a buyer of units since schemes can issue new units or redeem existing ones at any time.

This helps you be liquid as an investor giving you access to your money.

This provides you with the convenience of easily accessing your funds.