A unit trust is an investment fund contributed by several investors for investment in a portfolio of securities - stocks, bonds, money market instruments, real estate, etc - managed by a fund manager. It is simply an investment vehicle that seeks to employ the perceived professional skill of a fund manager to invest on behalf of diverse investors who pool their funds together for that purpose. In adopting this investment strategy, such investors save themselves the rigour of selecting and managing their investments by themselves, rather trusting in the competence of the professional fund manager to do so in their place. Usually, one justification for this is the expectation of better results than the individual hopes to personally achieve. Another is the fact that it allows them to benefit from a wider basket of investment assets which the manager is able to invest in with the pooled funds. The investor may choose to toe this path exclusively or just as one option for his investments.
Modalities
Like stocks, unit trust funds are denominated in units. Each investor buys into the funds by acquiring its units. In effect, what the investors directly receives is a certificate of ownership of a certain number of units of the fund, not the specific stocks, bonds or any other investment assets of the fund. The fund's assets themselves can be quite fluid, as the manager switches assets based on his reading of market opportunities. It is the prerogative of the fund manager to choose assets to invest in and the individual investor is not consulted. However, to protect investors and indeed meet their investment aspirations, each fund has its defined investment perimeter. In effect, what areas of investment it can undertake and the range of possible asset allocation to each asset class, are usually spelt out in its approved operational framework. The investor therefore generally knows the investment sectors his money is being channeled into but not necessarily the specific assets. Such assets are in the name of the fund, not the individual investors. While there is collective ownership of the underlying fund assets by all the fund investors (in proportion to units of fund held), no investor has ownership of specific fund assets. Investors will therefore only be able to sell their units of the fund, if they choose to realise their investment.
Regulation
Unit trusts are regulated by the Securities and Exchange Commission (SEC) which scrutinises and approves applications to operate such schemes. SEC therefore has the primary duty to protect investors in such funds and, so far, its ability to discharge that regulatory role has not been questioned. The law also requires the appointment of qualified trustees to further oversee the operation of a unit trust and see to the protection of the funds and the interest of the investors. All said, the investor always has a personal responsibility to guard his investment, especially by being alert to developments that can impact on the value of his investments and taking appropriate protective action, when necessary.
Subscription
Most units trusts are of the open-ended class. Such funds have no closing subscription date, meaning that subscription is an ongoing process. Any day you decide to invest, you simply provide the payment for the units you want, possibly fill a couple of forms and you're invested. You subsequently receive a certificate or other evidence of your subscription. Redemption of your investment, when you need, is through the fund manager. Unlike your stocks that you will forward to a stockbroker to sell on the stock exchange, you forward your request, in this case, to the fund manager for redemption.
Some unit trusts are grouped as closed-end funds. Such funds issue a specific numbers of shares during a subscription period and when that is closed, you are not able to buy into the fund as you would with an open-end fund. Sterling Capital Markets Limited managed Nigeria Energy Sector Fund is one example of a closed-end fund. Such funds are like the shares in any quoted company and are listed in the Managed Funds sector of the Nigerian Stock Exchange official listing of traded equities. They are therefore traded like other stocks, meaning that you can seek to buy in the secondary market, after the initial subscription.
Are Units Trusts for You?
They could be, either as an exclusive vehicle for investing or just as one option. They are however most-suited for investors who have good reason to want to rely on the expertise of a fund manager to invest their money. Beginners fall into this group. Anybody who doubts his personal ability to handle the selection and management of investments can also resort to this streamlined option. You may also use this vehicle to eliminate the stress and challenge of actively managing your investment portfolio - the 'headache' is turned over to the fund manager. Besides, investors with limited resources do not need to worry about spreading thin their resources in their bid to diversify. You enjoy that benefit of a diversified investment because the fund manager spreads his funds, within the approved coverage of the fund, to achieve the diversification and income goals that serve investors interests. Besides, there is always so much to gain by dealing with professionals in various sectors. When you work with a fund manager, there's every chance that you will learn lessons you don't pay tuition for. What you learn can easily be applied in managing other investment assets you hold. That access does not get drastically affected by your holding, even if it's modest - it still makes you a fund investor who could ask questions and cleverly learn lessons.
Existing Funds
If you are wondering if there are unit trusts to invest in, there's good news for you: there are. Grossly inadequate in number, given our population, but at least there to provide the opportunity for investors who want to use them. The poor level of investment knowledge in the society is a good ground for unit trusts to operate and invest on behalf of the relatively uninformed investors. Unfortunately, that same factor has made them largely unknown. Before you invest in any fund though, be sure to read our other resources on this investment strategy as they review other critical aspects of unit trust investment. Already looking for one? Check this SEC's list of registered schemes.
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