What to Look for in Choosing a Unit Trust
By Acceler8now.com Investing Education Team August, 2007
All investing requires careful scrutiny, because of the need, firstly, to protect capital. When you choose to invest in a unit trust, the responsibility to exercise such care is no less. As would be expected, not all unit trusts will invest successfully and generate a satisfactory net return from year to year. Some will fail to meet investor expectations, even with the possibility of incurring outright loss of principal investment. Some funds may even end up in liquidation for the reason of failed performance. These points should not leave you disillusioned, however, because nothing says that will be your experience. They are only facts of life, worth taking note of to guide your decisions and actions. If you recall the saying, "nothing ventured, nothing gained", you will easily put those variables in perspective and then focus on how to take steps that best safeguard your investment, while opening you up to opportunities that can materially advance your financial status. That's what this article is about. Let's examine how you can sieve through fund options to select those that have a high potential to meet your investment objectives.
Set Clear Investment Objective
That's right, otherwise how to you assess if your investment objective is met, if such objective is not clearly understood by you. Beyond that, the fact is that decision you need to take regarding your investment will be driven by the defined objective(s). What objective? You should know what your investment should achieve. Is it for a long-term nest-egg? Are you targeting capital appreciation over the long-term? Do you want to build funds for a specific purpose at a future date. Is it income-driven? As you will soon find out, there are options you have in fund selection which will be helped if you know what you are aiming for.
Range Your Risk Tolerance
Each time you invest, this consideration is important because, again, how you proceed will need to factor in your risk profile. Often, our risk tolerance is a factor of age, position in life and other variables that differ between individuals. Why does this matter? Because each fund has defined investment parameters - for instance, what classes of assets it invests in and the limits of each. Some funds are deliberately aggressive, going more for equities, in the hope of higher returns, but by that fact, more risky than, say, a fund heavily tilted to treasury securities. The latter is safer, but eliminates that potential for unquantifiable capital gains, available in equities. The different orientations serve different objectives and meet differing investor needs. You must know where you fit in to decide what suits your requirement.
Decide Your Fund Complexion
Now, you should be able to say the kind of fund you want to invest in. When you choose a fund manager, it should be that he manages a fund that has investment objectives that agree with yours. As you will find out, some managers operate more than one fund, meaning that you must even choose which of their funds you want to invest in. Usually, the difference is in the investment thrust of each fund. You will find, for instance, that the Coral Income Fund, Coral Growth Fund and Coral Ethical Fund are managed by the same fund manager and targeting different investor needs. By now, you should know what you are looking for: what kind(s) of fund and how many different unit trusts you want to invest with. For more guide on fund types and their general investment thrusts, see "What Funds Invest in...".
Evaluate Various Unit Trusts
With a clear idea of what you want, this part should get easier. Besides, you don't have thousands of options to wade through, unless you choose to invest offshore. Currently, available active funds in Nigeria may just be slightly above 20 in number, narrowing down your choice. Even at that, you still have a choice to make. What then counts? The ability to deliver, which you should take these steps to guage:
- Profile the Fund Manager
You have no business throwing your money into wrong hands. Who will you blame if you do so? So, research the fund manager. Firstly, you must deal with an approved fund and licensed fund manager, and this you can easily find out from the Securities and Exchange Commission. Beyond that, credibility is critical. One guide: a number of funds are managed by fund-managing subsidiaries of major financial institutions. I always feel more comfortable with such institutions that have the backing of a strong parent company. It signifies, more importantly, higher corporate governance and due process and, perhaps, less risk of sharp practices. Be sure you are comfortable with the fund manager you want to invest with, especially in terms of integrity, but also as to competence.
- Evaluate the Trustees too
Each unit trust has trustees to safeguard the assets of the fund and protect the interests of investors. This function is obviously as good as the caliber of the trustee. You want to know who the trustees to the fund are. Again, a strong institution in this role should give some comfort.
- Check Fund's Investment Thrust
The fund's prospectus will show its defined objectives, investment scope and the broad parameters guiding the fund manager. He is supposed to exercise his investment discretion within this framework. Review what the fund is set up to do and see that this agrees with your investment goal. If a fund is set up to exclusively invest in pork production and this disagrees with your belief, you clearly don't have any business with such fund. If, as a young man you want to take a chance for rapid growth, you don't pursue that with a safety-oriented money market fund, investing in T-Bills. No, you go for a stock market growth fund, where there is a chance of high growth or loss, depending on how the market swings. Ask for this document.
- Review The Fund's Track Record
You must be satisfied with the fund's performance track record as you obviously would want to be where there is a party, not a funeral. If investors have been moaning and enduring poor returns, perhaps as a result of poor investment or management strategies, you don't want to swell their number, do you? Review the fund's financial statements, which they should be ready to provide to a potential investor. They will probably have a lot of brochures and literature summarising the relevant facts. Take time to review all the documents, checking, particularly the year-to-year total fund return and other performance trends. For instance, is the fund growing or shrinking? You should be able to benchmark the fund's performance with other funds and the market averages to judge how well it has done. If the figures don't look good, do you need to be told to look elsewhere?
- Fee Structure
Whatever fees that are charged should also be spelt out to you. You don't want to walk into a landmine, so determine, before hand, the charges that apply and that these are reasonable and competitive. If a high-performing fund manager has higher fees, you certainly need to do the math and know if the returns more that recover the cost differential. Overall, be sure that you have a fair deal.
- Administrative Modalities
This is unlikely to pose a problem, but it's good to know. Most funds are flexible, allowing additions to your investment, even in relatively small amounts. You may operate a standing order with your bank to transfer to the fund manager. Some provide online access to monitor or manage your account. Redemption should also be easy when you need to realise some or all of your investment. Ask to know details of how the fund operates to be sure that you won't meet unwanted surprises.
 Take a Decision and Get Going
In the end, the most important part is the action you take. Taking care to put your money in the right hands is critical and should not be toyed with. But ultimately, be sure to initiate the real investing because that is what it's all about. Understand that each little step you take, some of which will practically have no impact today, will, all being well, begin to count for much even before you realise it. A few things go wrong sometimes, but that is life. The consolation - and a big one at that - is that, on the average, a lot of things work out, for the few that fail. If you expand the scope of positive actions you take, even if you discount for a few options that may fail to deliver to expectation, you will find yourself clearly in satisfying positive territory, far beyond where you started. The problem, most times, is that people are unable to visualise that distant future, and because they can't readily sense an immediate impact of the action they ought to take, they fail to get motivated to act. So, they miss the opportunities for sowing the seed of tomorrow's accomplishments. Take action, man, take action! That's what will change the complexion of your future. And it has to be by gradual, even unnoticeable steps whose individual impact you are unlikely to readily feel, but it is their cumulative effect that defines a different future for you.
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