A unit trust is a type of investment fund where investors pool their money together to buy a collection of investments. These investments can include shares, bonds, property, or a combination of these assets. The fund is then managed by a professional fund manager who buys and sells assets on behalf of the investors. The returns generated by the unit trust are distributed among the investors based on the number of units they hold in the fund.
Importance of Investing in Unit Trusts:
1. Professional Management: One of the primary benefits of investing in unit trusts is that they are managed by professional fund managers. These managers have the expertise and knowledge required to make informed investment decisions. By investing in a unit trust, you can benefit from the knowledge and experience of the fund manager, who will make decisions on your behalf.
2. Diversification: Investing in a unit trust allows you to diversify your investments. By investing in a collection of assets, you can spread your risk and reduce the impact of any one investment underperforming. Diversification can also help to protect your investments during market downturns.
3. Convenience: Unit trusts are an easy and convenient way to invest your money. You can invest in a unit trust with a relatively small amount of money, and you do not need to have a lot of knowledge or experience to invest in them. Furthermore, the fund manager handles all the administrative tasks associated with managing the fund, so you do not need to worry about them.
4.Transparency: Unit trusts are transparent investment vehicles, and investors can easily track the performance of their investments. Fund managers are required to provide regular updates on the fund’s performance, so investors can keep track of their investments’ progress.
5. Liquidity: Investing in a unit trust provides investors with the flexibility to sell their units at any time. This means that investors can access their money quickly if they need it.
6. Affordability: Unit trusts allow investors to invest small amounts of money, making it accessible to a wider range of investors.
Types of Unit Trusts Available in Kenya
There are two types of unit trusts available in Kenya:
1.Open-ended unit trust. Open-ended unit trusts are the most common type in Kenya and are designed to be easily bought and sold by investors. Investors can buy or sell units at the prevailing market price at any time, making it a flexible investment option.
2. Closed-ended unit trusts. on the other hand, have a fixed number of units available for purchase, and investors cannot buy or sell units at will.
Regulations governing unit trusts in Kenya
Unit trusts are regulated by the Capital Markets Authority (CMA) in Kenya, which is responsible for ensuring that unit trusts comply with the regulations set out in the Capital Markets Act. The CMA requires all unit trusts to be registered with them and to follow strict disclosure and reporting requirements. The fund managers must also meet certain qualifications and experience requirements.
Steps to Invest in a Unit Trust in Kenya:
- Choose a unit trust provider: There are several unit trust providers in Kenya, including banks and investment firms. Research and compare the providers’ offerings to find the one that best suits your investment objectives and risk appetite.
- Open a unit trust account: Once you have chosen a provider, open a unit trust account with them. This involves filling out an application form, providing identification documents, and making an initial investment.
- Select a fund: The provider will offer a range of unit trust funds that invest in different asset classes, such as equity, bonds, or property. Choose the fund that aligns with your investment goals.
- Make a regular investment: To maximize the benefits of unit trust investments, it is recommended to make regular investments. You can set up a standing order or direct debit to make these investments automatically.
- Monitor your investment: Track the performance of your investment by reviewing regular reports and updates provided by the fund manager. If necessary, consider adjusting your investment strategy based on your investment goals and market conditions.
Types of Assets that Unit Trusts Invest In
Unit trusts invest in a range of assets, including:
- Equities: Unit trusts can invest in a portfolio of stocks or shares of companies listed on the stock exchange.
- Bonds: Unit trusts can invest in fixed-income securities such as government bonds, corporate bonds, and treasury bills.
- Property: Unit trusts can invest in physical properties or real estate investment trusts (REITs).
- Cash: Unit trusts can invest in cash, short-term deposits, and other money market instruments.
Risks and Returns Associated with Unit Trusts in Kenya:
Like any investment, unit trusts come with risks and potential rewards. Some of the risks and returns associated with unit trust investments in Kenya include:
- Market risk: Unit trusts are subject to market risk, meaning the value of the investments may rise or fall based on market conditions.
- Inflation risk: Inflation can erode the value of your investment, potentially reducing its purchasing power over time.
- Management fees: Unit trusts are managed by professional fund managers, who charge management fees for their services. These fees can reduce the returns on your investment.
- Potential returns: Unit trusts have the potential to offer higher returns than traditional savings accounts, but this is not guaranteed. The returns are dependent on the performance of the underlying assets in the fund.
Conclusion
Unit trusts are a viable investment option for Kenyan investors looking to diversify their investments and potentially earn higher returns. To invest in a unit trust, investors need to choose a provider, open a unit trust account, select a fund, make regular investments, and monitor their investment regularly.
