Page 41 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Basic Concepts

Chapter 2
Basic Concepts
Basic Concepts

NQF
Relevant to
What is a Collective Investment 242594: 1
Scheme? 242612: 2, 4
243129:1-4
243130: 2, 4
The fundamental premise behind a collective investment scheme (CIS) is simple:
243148: 5
a group of investors pool their money in order to get a spread of professionally 243154: 2
managed investments. The group of investors is normally large, although CISCA only 243155: 1, 2, 4
requires two or more investors for a scheme to qualify as a CIS. An important
characteristic of a CIS is that investors share the risks and benefits of investment in a
scheme in proportion to their participatory interests in the scheme.
Unit trusts are currently the most common CISs in South Africa. Originally, these were
designed to give ordinary people access to the JSE. Many investors do not have sufficient money to
buy a spread of quality shares (and a range of shares is important to reduce risk). Via a unit trust,
an investor can own part of a diversified, professionally managed blue-chip portfolio by investing a
modest amount of money, either once-off or on a monthly basis.
Simple and Straightforward
The popularity of unit trusts in South Africa can be attributed to the simplicity of the product
structure, cost transparency, the ease of valuing unit trust investments, and the simplicity of
buying into and selling out of these products. The industry has created systems which make it very
straightforward for investors to buy unit trusts, either through a financial advisor, directly via a
management company, or even online. Convenient unit trust product features include monthly
debit order facilities and reinvestment of income.

Monthly Debit Orders
One of the convenient features taken for granted by unit trust investors is the monthly debit
order facility offered by nearly all CIS managers. A bank authority signed by the investor allows the
CIS manager or LISP to deduct a fixed monthly amount, creating a “contractual saving” for the
investor.
Unit trust investments made on a monthly debit order basis enjoy the benefit of what is called
“rand cost averaging” (see Chart 2.1).
Using the debit order system, an investor buys unit trust units by investing the same amount of
money every month regardless of the market price. Rand cost averaging allows the investor to
avoid guessing whether the market is going up or down. The advantage of this method
is that your rand buys more units when prices are declining.
Share market prices are typically cyclical in nature.
Although over the long-term they go up more than they go Blue Chip
down, share markets usually advance in a series of rushes “Blue chip” companies are
and retreats. While some market professionals try to use the major, “household name”
“dips” to buy while prices are down, it is notoriously companies which can be expected to
difficult to pick market low points. For many investors, rand offer financial stability and reasonably
cost averaging eliminates the problem of trying to spot stable performance. The shares of
market “troughs”. By buying on a fixed monthly basis, the listed companies with competent
investor acquires units at a reasonable average price. management and a proven track
record (companies that show good
profit growth, year after year) are
called blue chip. The term is derived
from what was traditionally the poker
chip with the highest value.

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts