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

Chapter 2 Basic concepts

Chapter 2

Basic concepts
NQF
Relevant to
What is a collective investment scheme? 242594: 1
The concept behind a collective investment scheme (CIS) is simple: a group 242612: 2, 4
of investors pool their money in order to get a spread of professionally managed 243129: 1 - 4
243130: 2, 4
investments. The group of investors is normally large, although the Collective 243148: 5
Investment Schemes Control Act (CISCA) only requires two or more investors for a 243154: 2
scheme to qualify as a CIS. An important characteristic of a CIS is that investors share 243155: 1, 2, 4
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 SA, 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 SA 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 service 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 Figure 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 when prices are declining.
Share market prices are typically cyclical in nature. Although over the long-term they go up more
than they go down, share markets usually advance in
a series of rushes and retreats. While some market
Blue chip professionals try to use the “dips” to buy while prices are
Blue chip companies are major, down, it is notoriously difficult to pick market low points.
household name companies which can For many investors, rand cost averaging eliminates the
be expected to offer financial stability problem of trying to spot market “troughs”. By buying
and reasonably stable performance. The shares of on a fixed monthly basis, the investor acquires units at a
listed companies with competent management and a reasonable average price.
proven track record (companies that show good profit
growth, year after year) are called blue chip. The term The power of compounding
is derived from what was traditionally the poker chip Both lump sum and debit order investments in unit
with the highest value. trusts can benefit from the power of compounding.

34 Profile’s Unit Trusts & Collective Investments September 2025