Page 36 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 2

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 concept behind a collective investment scheme (CIS) is simple: a group of
243148: 5
investors pool their money in order to get a spread of professionally managed 243154: 2
investments. The group of investors is normally large, although the Collective 243155: 1, 2, 4
Investment Schemes Control Act (CISCA) only 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 Linked Investment Services Provider (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
Blue Chip when prices are declining.
“Blue chip” companies are Share market prices are typically cyclical in nature.
major, “household name” Although over the long-term they go up more than they go
companies which can be down, share markets usually advance in a series of rushes
expected to offer financial stability and and retreats. While some market professionals try to use the
reasonably stable performance. The “dips” to buy while prices are down, it is notoriously difficult
shares of listed companies with to pick market low points. For many investors, rand cost
competent management and a proven averaging eliminates the problem of trying to spot market
track record (companies that show “troughs”. By buying on a fixed monthly basis, the investor
good profit growth, year after year) are acquires units at a reasonable average price.
called blue chip. The term is derived
from what was traditionally the poker
chip with the highest value.

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