Page 36 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 2

Chapter 2
Basic Concepts
Basic Concepts

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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, but there is a now a growing
base of exchange traded funds, actively managed exchange traded funds and hedge funds that are
also CISs. Unit trusts were originally 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 adviser, 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
Blue Chip regardless of the market price. Rand cost averaging allows
the investor to avoid guessing whether the market is going
“Blue chip” companies are
major, “household name” up or down. The advantage of this method is that your rand
companies which can be buys more units when prices are declining.
expected to offer financial stability and Share market prices are typically cyclical in nature.
reasonably stable performance. The Although over the long-term they go up more than they go
shares of listed companies with down, share markets usually advance in a series of rushes
competent management and a proven and retreats. While some market professionals try to use the
track record (companies that show “dips” to buy while prices are down, it is notoriously difficult
good profit growth, year after year) are to pick market low points. For many investors, rand cost
called blue chip. The term is derived
from what was traditionally the poker averaging eliminates the problem of trying to spot market
chip with the highest value. “troughs”. By buying on a fixed monthly basis, the investor
acquires units at a reasonable average price.

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