Category Investments

Five things to consider when selecting a unit trust fund

29 September 2014 Glacier Research, Glacier by Sanlam

With the universe of collective investment schemes, or unit trusts, growing almost daily, it’s easy for investors to select a name they know or to invest with a fund that may have received favourable media coverage in recent months. But not doing enough ‘homework’ may result in an investor’s hard-earned-savings not realising the returns they could.

This article looks at five things investors should be wary of when selecting a fund.

1. Don’t underestimate accessibility and transparency

It goes without saying that company and fund information should be readily available. The website should provide contact details, including a landline telephone number and physical address.

Information on the individual or team managing the fund, as well as the fund fact sheets, should also be provided on the website. The fund manager’s qualifications and working experience are important, as is the division of duties. In other words, is there an administrative team backing up the fund management team? This may affect the length of time taken to process investment requests, and to access your funds when needed.

2. Don’t ignore the size of the fund

A fund that hasn’t accumulated a large asset base may pose a liquidity risk (the risk that you may not be able to sell your units as quickly as you want to), should a large investor want to access their funds at short notice. That’s not to say, though, that a large fund is the correct choice. The larger the fund, the more difficult it may become to outperform (in the case of an equity fund), as a larger fund may be less flexible with respect to available investment opportunities.

Deciding on an optimal fund size is not always an easy decision and this is where a qualified financial adviser can play a valuable role in understanding and explaining the approach and strategy of the manager.

3. Don’t give past performance a cursory glance only

It’s well-known that past performance is not necessarily an indicator of future performance. The past performance history of the fund is important – but doesn’t paint a full picture unless viewed in context.

Other things to consider include the experience and qualifications of the investment team. Is the team’s philosophy and their process simple and easy to understand? If there are changes in the style or philosophy of the fund, it’s important that your own investment objectives still be in alignment with the fund objectives.

4. Don’t ignore costs

When expressed as a percentage, costs may sound insignificant, but can add up to a substantial amount when compounded over a lengthy investment term.

Questions to ask include: Is the cost in line with other funds in the same category? Does the fund charge a performance fee and if so, how is this calculated? Is the fee reasonable, given the expected return?

Closely linked to this is the benchmark used by the fund. The benchmark should be appropriate (you can check the benchmark used on the fund fact sheet) and in line with your individual objectives and risk profile.

5. Don’t put off obtaining professional, independent advice

In addition to helping investors to set objectives and determine their risk profile, a qualified financial adviser can be invaluable in cutting through the plethora of information and making sense of the complexity. Not only is the number of available funds constantly increasing, but tax complexity is increasing globally too. Financial advisers can help to mitigate these risks for clients. They also have their ears to the ground when it comes to legislation and other changes in the industry.

With increasing longevity, many people can expect to spend as long, if not longer, in retirement than they did working. This means there is no room for mistakes. A qualified financial adviser can add value as a lifestyle and longevity consultant.


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