“Working together for a skilled tomorrow”
National Certificate in Insurance Administration
NQF Level 3
Unit Standard 8990:
Describe unit trusts as an investment.
Credits:
2
Notional Hours of Learning: 20
Learner Material
This outcomes-based learning material was developed by IISA
with funding from INSETA in March 2003.
The material is generic in nature.
It’s purpose is to serve as a guide for the further development and
customization of company-specific, learner-specific
and situation-specific learning interventions.
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Contents
Topic
Unit Standard
Page
........................................................................................................................ 3
Learner material ........................................................................................................................ 6
Instructions ...................................................................................................... 7
Examples: Oral assessment ......................................................................... 11
Guide for Assessment of Portfolio .............................................. 12
Additional Notes ……………………………………………………………………………………….15
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TITLE:
Describe unit trusts as an investment.
UNIT STANDARD NUMBER:
8990
LEVEL ON NQF:
3
CREDITS:
2
PURPOSE:
This unit standard introduces the basic concepts of unit trusts and provides a broad introduction to unit
trusts as an investment.
The qualifying learner is capable of:







Knowing and understanding the concept of a unit trust.
Identifying different investment products used by unit trust management companies.
Classifying unit trusts according to type.
Recognising the long term nature of unit trusts as an investment.
Applying knowledge of customer profiles and risk to unit trusts.
Illustrating information graphically.
Asking questions to obtain information.
LEARNING ASSUMED TO BE IN PLACE:
There is open access to this unit standard. Learners should be competent in Communication and
Mathematical Literacy at NQF Level 2. Learners should
SPECIFIC OUTCOMES AND ASSESSMENT CRITERIA:
SO
Description
Assessment Criteria
1.
Know and explain the concept
of a unit trust
1.1 The concept of an investment portfolio is illustrated graphically.
1.2 The concept of pooling is illustrated graphically.
1.3 The role of diversification in an investment is explained in
relation to an investment portfolio.
1.4 Basic terms associated with a unit trust including but not limited
to interest, income, equity, capital growth, yield, money market,
unit price, charges and basic tax details are understood and
explained with reference to a selected unit trust.
1.5 The inherent advantages and disadvantages of unit trusts as an
investment are listed from the point of view of a small
investor/new investor.
2.
Identify
the
different
investment products that a unit
trust invests in
2.1 The different investment products such as equities, shares, gilts,
money market instruments, futures derivatives, interest bearing
deposits are named with examples of each.
2.2 The investment potential of the different products is compared
based on the investment characteristics of the product.
2.3 The risk attached to each investment product is indicated based
on growth and income.
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3.
Catagorise the different types
of unit trusts
3.1 Index, property, and balanced unit trusts are illustrated
graphically.
3.2 The basis for the classification of a unit trust is indicated
according to its investment portfolio.
3.3 The risk element of two unit trust investment portfolios is
compared and reasons are given for the difference in risk.
3.4 The geographical classes of unit trusts are named with examples
of unit trusts funds in each class.
3.5 The broad asset classes applied to unit trust funds are named with
an example of a fund in each category.
3.6 Two examples of specialist categories of unit trust funds are
listed with examples of each type of specialist fund.
4.
Recognise unit trusts as a long
term investment
4.1 The impact of market trends of the stock exchange on unit trust
prices is explained with reference to examples.
4.2 Volatility is explained in terms of market fluctuation.
4.3 The concept of Rand cost averaging is explained using a graph to
illustrate the underlying principles.
4.4 The principles of compound interest are understood and
illustrated by performing simple calculations.
5.
Apply knowledge of customer
profiles and risk to unit trusts
5.1 Questions are asked to establish a basic customer profile.
5.2 The risk category most likely to apply to the customer is
indicated.
5.3 The customer profile is matched to two unit trust types.
5.4 The advantages and disadvantages of investing in the two types of
unit trust are compared.
5.5 Possible investment options are posed for the customer profile.
ACCREDITATION AND MODERATION:
This unit standard will be internally assessed by the provider and moderated by a moderator registered by
INSQA or a relevant accredited ETQA. The mechanisms and requirements for moderation are contained
in the document obtainable from INSQA, INSQA framework for assessment and moderation.
RANGE STATEMENT:
The typical scope of this unit standard is:
Unit trusts including wrap funds, combination funds and funds of funds.
The geographic classes of unit trusts including domestic, worldwide, foreign and regional funds.
Asset classes including equity, fixed interest and combinations of these
CRITICAL CROSS FIELD and DEVELOPMENTAL OUTCOMES:
This unit standard supports in particular, the following critical cross field outcomes at unit standard level:
1.
Learners can communicate effectively using visual skills when presenting the concepts of
investment portfolios and pooling.
2.
Learners can identify and solve problems by matching the customer profile to 2 unit trust types.
3.
Learners can collect, organise and evaluate information when comparing the risk element of two
unit trust portfolios and when giving reasons for the differences in the risk.
4.
Learners are able to demonstrate an understanding of the world as a set of related systems when
explaining the impact of market trends on the stock exchange.
5.
Learners can use science and technology effectively by understanding and illustrating the
principles of compound interest.
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PROCESS
The task you need to complete is made up of several activities. Each activity must be ticked off
as you finish it.
Please note: To complete Specific Outcome One, you will require copies of the following Acts:
 Income Tax Act
 Long Term Insurance Act
 Pension Fund Act
Number
Specific Outcome 1
Know and explain the
concept of a unit trust
Aspect of task
Consult your resources and draw a diagram to describe the
concept of an investment portfolio. Compare and discuss your
illustration with the members of your study/syndicate groups and
paste a copy of the best diagram that your group comes up with into
your portfolio. Record the collective graphic illustration.
Done
Activity 1
Specific Outcome 1
From your sources make a drawing/diagram that explains the
concept of pooling. Keep your illustration
Activity 2
Specific Outcome 1
Consult your sources and explain the role of diversification in an
investment portfolio. Write down your explanation
Activity 3
Specific Outcome 1
Activity 4
Specific Outcome 1
Activity 5
Specific Outcome 2
Identify the different
investment products
that a unit trust invests
in
Study your resources and from your understanding explain basic
terms associated with a unit trust, including but not limited to
interest, income, equity, capital growth, yield, money market, unit
price, charges and basic tax details, using a unit trust of your
choice. Write down your explanation
Consult your sources and list three (3) advantages and three (3)
disadvantages of unit trusts as an investment for a small
investor/new investor. Write these down.
From your resources name the different investment products such
as equities, shares, gilts, money market instruments, futures
derivatives, interest bearing deposits, and give examples of each.
Compare and discuss your findings with the members of your
study/syndicate group and keep a record of your findings.
Activity 6
Specific Outcome 2
Activity 7
Specific Outcome 2
Activity 8
From your sources compare the investment potential of the different
products in activity 6,based on the characteristics of the product.
Keep your comparison
Using your resources and from your understanding rate the risk
attached to each of the investment products in activity 6, based on
growth and income, on a scale of 1 to 5, with 1 being the lowest
risk. Write down your rating.
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Number
Specific Outcome 3
Categorise the
different types of unit
trusts
Aspect of task
Using your resources and from your understanding illustrate index,
property, and balanced unit trusts graphically. Compare and
discuss your illustration with the members of your study/syndicate
group and record an agreed illustration.
Done
Activity 9
Specific Outcome 3
From your sources describe the basis for the classification of a unit
trust, according to its investment portfolio. Write down your findings.
Activity 10
Specific Outcome 3
Activity 11
Specific Outcome 3
Activity 12
Specific Outcome 3
Activity 13
Specific Outcome 3
Activity 14
Specific Outcome 4
Recognise unit trusts
as a long term
investment
From your sources compare the risk element of two different unit
trust investment portfolios, and give two (2) reasons for the
difference in risk. Keep a record of your comparison and reasons.
Consult your sources and name the geographical classes of unit
trusts with examples of two (2) unit trusts funds in each class.
Record the names and examples in your portfolio
Consult your sources and name the broad asset classes applied to
unit trust funds, with an example of a fund in each category. Record
the names and examples.
Consult your sources and list two examples of specialist categories
of unit trust funds with an example of each type of specialist fund.
Record the examples in your portfolio.
From your sources explain how stock exchange market trends
affect unit trust prices, using examples. Compare and discuss your
findings with the members of your study/syndicate group and make
a note of the group’s findings
Activity 15
Specific Outcome 4
Study your resources and explain volatility in terms of market
fluctuation. Record your explanation.
Activity 16
Specific Outcome 4
Activity 17
Specific Outcome 4
Activity 18
Consult your resources and explain Rand cost averaging, using a
graph to illustrate the underlying principles. Record your
explanation and graph in your portfolio.
Using your sources and from your understanding explain how
compound interest works by doing simple calculations. Record your
examples and calculations.
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Number
Specific Outcome 5
Apply knowledge of
customer profiles and
risk to unit trusts
Aspect of task
Consult your resources and, using the members of your
study/syndicate group in role a play, draw up questions to establish
a basic customer profile of a group member. Record the profile in
your portfolio.
Done
Activity 19
Specific Outcome 5
Activity 20
Specific Outcome 5
From your questions indicate the risk category most likely to apply
to the profile in activity 19.(Where do the risk categories come
from?)
Record your findings.
Match the risk profile to two unit trust types. Record the types in
your portfolio
Activity 21
Specific Outcome 5
Activity 22
Specific Outcome 5
Compare three advantages and three disadvantages of investing in
each of the two types of unit trusts in activity 21. Keep a record of
the comparison
Suggest three possible investment options for the risk profile from
activity 19. Record your options in your portfolio.
Activity 23
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CRITICAL CROSS FIELD OUTCOMES MATRIX
Activity
Solve
problems
/ make
decisions
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Teamwork
Organisation
Information
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Communicate
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Technology
Related
system
Personal
Development
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ORAL ASSESSMENT
The trainer will use this table to monitor your participation during the discussions at your contact
sessions. You are expected to contribute during each of the contact sessions.
Action
Yes
No
The learner brought summaries and notes made to the sessions for
discussion. The learner makes notes during the discussion, where
notes are required to be transcribed.
1. The learner will be able to discuss the different investment products
that are used by unit trust managers as investments for their clients.
2. The learner will be able to discuss the classification unit trusts
according to their type.
3 The learner will also be able to discuss the advantages of investing
in unit trusts and that investing in unit trusts may be beneficial in the
long term.
4 The learner will be able to discuss market volatility and price and
currency fluctuations and how these affect the short term and long
term benefits of a unit trust.
The learner can take part in group discussions by talking about other
Learner’s feedback and portfolios.
The learner shows understanding of and can indicate the scope of life
insurance in South Africa.
LIFELONG LEARNING
This short module has introduced you to unit rusts as an investment. It is important do this module, since
the financial well-being of clients depends on the learner's understanding of the products on offer and the
best options for the client
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GUIDE FOR ASSESSMENT OF PORTFOLIO
Assessment Criteria
Specific Outcome 1
Know and explain the
concept of a unit trust
No.
Competent
All activities done, all questions
answered correctly.
Not yet competent
All or part of each activity not
done or incomplete or all
questions not answered.
No 1.
 The concept of an investment
portfolio is illustrated graphically.
 Illustration not recorded
No 2.
 The concept of pooling is illustrated
graphically.
 The role of diversification in
an investment is explained in
relation to an investment
portfolio.
 Basic terms associated with a
unit trust including but not
limited to interest, income,
equity, capital growth, yield,
money market, unit price,
charges and basic tax details
are understood and explained
with reference to a selected
unit trust.
 Illustration not recorded
 The inherent advantages and
disadvantages of unit trusts as an
investment are listed from the point
of view of a small investor/new
investor.
 List not recorded
No 3
No 4
No 5.
Specific Outcome 2
Identify the different
investment products that
a unit trust invests in.
 Explanation not recorded
 Explanation not recorded
No 1.

The different investment
products such as equities,
shares, gilts, money market
instruments, futures
derivatives, interest bearing
deposits are named with
examples of each
 Product and examples not
recorded
No 2.

The investment potential of
the different products is
compared based on the
investment characteristics of
the product.
 Comparison not recorded
No 3.

The risk attached to
each
investment product is
indicated based on growth
and income.
 Findings not recorded
No 4.

Index, property, and balanced
unit trusts are illustrated
graphically.
 Illustration not recorded
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Assessment Criteria
Specific Outcome 3
Categorise the different
types of unit trusts.
Specific Outcome 4
Recognise unit trusts as
a long term investment.
No.
No 1.

No 2.

No 3

No 4

No 5.

No 1.
No 2.
No 3.
Specific Outcome 5
Administer the transfer
between and within two
funds or options
No 1.
Specific Outcome 6
Apply knowledge of
customer profiles and
risk to unit trusts.
No 1.
No 2.
No 3.
Competent
The basis for the
classification of a unit trust is
indicated according to its
investment portfolio.
Not yet competent
 No notes made
The risk element of two unit
trust investment portfolios is
compared and reasons are
given for the difference in
risk.
The geographical classes of
unit trusts are named with
examples of unit trusts funds
in each class.
 No questions answered
The broad asset classes
applied to unit trust funds are
named with an example of a
fund in each category.
 No notes
Two examples of specialist
categories of unit trust funds
are listed with examples of
each type of specialist fund.
 The impact of market trends of the
stock exchange on unit trust prices
is explained with reference to
examples
 Volatility is explained in terms
of market fluctuation.
 The concept of Rand cost
averaging is explained using a
graph to illustrate the underlying
principles.
 The principles of compound
interest are understood and
illustrated by performing
simple calculations.

Questions are asked to
establish a basic customer
profile.
 The risk category most likely to
apply to the customer is indicated
 The customer profile is
matched to two unit trust
types.
No 4

No 5.

The advantages and
disadvantages of investing in
the two types of unit trust are
compared.
Possible investment options
are posed for the customer
profile.
 No questions answered
 No questions answered
 Did not identify the various
types of intermediaries and
compare them to one
another
 No Photocopy
 No reasons
 No copies found
 No paragraph written

No information
 No information
 No evidence of
appointment and no notes
 No information found
 No details for programme
 Did not answer questions
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ADDITIONAL NOTES
Objectives of Learning
At the end of this Unit Standard, the learner will be able to:
1. Use graphics to illustrate the concept of an investment portfolio.
2. Use a diagram to illustrate the concept of pooling in unit trust investments.
3. Give 3 reasons why it is important that the unit trust manager uses diverse investments
to create an investment portfolio.
4. Be able to provide working definitions of the following basic terms by referring to a
selected unit trust:














Interest
Income
Equity
Capital growth
Yield
Money market
Unit price
Risk
Pooling of investments
Trustee
Management company
Portfolio
Selling/buying price,
And any other financial terminology that may be new to the learner.
5. Explain the basic rules of taxation that affect the buying and selling of unit trust funds.
6. List three advantages of investing in unit trusts, from the viewpoint of a first-time, small
investor.
7. List three disadvantages of investing in unit trusts, from the point of view of a small, firsttime investor.
8. Give examples of investment products such as equities, shares, gills, money market,
future derivatives and interest bearing deposits.
9. Compare the investment potential of the different investment products based on the
product’s investment characteristics.
10. Describe the risk attached to each of the investment products, using growth and income
as the measurement criteria.
11. Categorise the different types of unit trusts.
12. Graphically illustrate index, property and balanced unit trusts.
13. Indicate the basis for classifying a unit trust, according to its investment portfolio.
14. Compare the risk element of 2 unit trust investment portfolios.
15. Give reasons for the difference in the risk element of the two unit trust investments.
16. Name the geographical classes of unit trusts, such as domestic, worldwide, foreign and
regional funds.
17. Give examples of each geographical class of unit trust.
18. Name the broad asset classes that apply to unit trusts.
19. Give an example of each of the broad asset classes of unit trust funds.
20. List two examples of specialist categories of unit trust funds.
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21. Give examples of each type of specialist fund.
22. Explain the impact of market trends of the stock exchange on unit trust prices.
23. Give examples of how market trends affect the price of unit trusts.
24. Explain what is meant by “volatility” in terms of fluctuations of the market.
25. Use a graph to illustrate the principles that underlie Rand cost averaging.
26. Demonstrate an understanding of the principles of compound interest by performing
simple calculations.
27. Establish a customer profile by asking appropriate questions.
28. Based on the customer’s responses, indicate the risk category that is most likely to apply
to the aforesaid customer.
29. Match the customer profile to two types of unit trusts.
30. Compare the advantages and disadvantages of the two types of unit trusts.
31. Suggest possible investment options for the customer who has been profiled.
32. Apply knowledge of investment options to customer’s needs.
Things that the Learner Must DO
a) Use a diagram to illustrate the concept of an investment portfolio.
b) Use a diagram to illustrate the concept of pooling investments.
c) Explain why diversification is an integral part of unit trusts as an investment.
d) Explain the basic terms associated with unit trusts by referring to a chosen unit trust.
e) Create a presentation outlining 3 advantages and 3 disadvantages of investing in a unit trust
for a potential first-time investor.
f)
Identify a range of at least 6 different investment products.
g) Compare the investment potential of the investment products.
h) Indicate the risk attached to each investment product, based on growth and income.
i)
Use a diagram to illustrate the difference between index, property and balanced unit trusts.
j)
Give reasons for the classification of a unit trust, according to its investment portfolio.
k) Compare the risk element of two unit trust investment portfolios
l)
Give examples of each of the geographical classes of unit trust funds.
m) Name the broad asset classes of unit trust funds.
n) Give examples of each of the broad asset classes.
o) List 2 examples of specialist categories of unit trust funds.
p) Give examples of each of the 2 specialist categories listed above.
q) Give 3 reasons why unit trusts are seen as a long-term investment.
r) Use a graph to illustrate the underlying principles of Rand cost averaging.
s) Perform simple calculations of compound interest correctly.
t)
Design a questionnaire to enable the learner to establish a customer profile.
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u) Use the questionnaire to establish a basic customer profile.
v) Match the customer profile to 2 types of unit trusts.
w) Compare the advantages and disadvantages of the 2 types of unit trusts.
x) Draw up a list of investment options that will match the customer profile.
Things that the Learner must KNOW
i)
What a unit trust is.
ii)
The reason for investing in unit trusts.
iii)
The terminology associated with unit trusts.
iv)
The pros and cons of investing in unit trusts.
v)
The different investment products used by unit trust managers.
vi)
The advantages of disadvantages of the various investment products.
vii)
The risks attached to each investment product.
viii)
The various categories of unit trusts.
ix)
Why unit trusts are a long-term investment.
x)
How other events in the environment affect the unit trust industry.
xi)
What Rand cost averaging is.
xii)
How to calculate compound interest.
xiii)
How to establish a customer profile through questioning potential customers.
xiv)
How to match the needs of the customer to a suitable unit trust type.
xv)
The advantages and disadvantages of investing in various types of unit trusts.
xvi)
How to present the information in a manner that is interesting and of value to a customer.
xvii)
Other investment options are available to the customer.
Problems that the Learner May Encounter
 Learners who have not encountered unit trusts previously may struggle to understand them.
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Page 15
 Some of the terminology may be new to the learners, especially terms such as money
market, equities and gilts.
 Some learners may find the presentation requires more skill than they had anticipated.
 Some learners may need to be guided as to the nature of the questions they ask in order to
establish a customer profile.
Resources
 The learners and the facilitator’s experience at the workplace and in their private capacities.
 The financial media, such as the Business Day, Financial Mail, the Business Report of the
Star group of newspapers etc.
 Material from the Association of Unit Trusts.
 The Internet.
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Introduction
One of the problems that we face as soon as we start to earn our own money is how to
make it go further! Initially, we may start by cutting down on the little treats that we
enjoy, but when that seems to make very little difference we may look at ways to invest
money in order to make more money.
What is a Unit Trust?
Unit trusts are a form of investment, and they are accessible to all. The word “unit” refers to the
portion or part of the unit trust that is owned by the investor.
The “trust” is the financial instrument that is created in order to manage the investment. The
trust enables financial experts to invest the money on behalf of the unit trust holder.
Unit trusts provide a means for ordinary people to invest in the Stock Exchange and to beat
inflation by getting good returns. As you know, there are many other ways to invest your
money. One may put money into a fixed deposit account, or you may decide to take out life
insurance so that your loved ones will be provided for after you have died. You may be the
gambling type, and decide that you want to buy 5 Lotto tickets for yourself every week for the
next year. You may be lucky, or you may win nothing at all. If you are the more cautious type,
you may decide that you want to invest your money in a unit trust fund.
Unit trusts provide a relatively secure means of investing on the Stock Exchange, and other
financial instruments. The sums of money that are exchanged on the Stock Exchange and in
the Money Markets make them too pricey for most people. With a unit trust, the money or funds
from a group of investors are pooled or collected together to form a unit trust fund. This unit
fund will then contain sufficient capital (i.e.money) for the unit trust fund manager to be able to
invest it wherever s/he thinks the best returns on the investment are to be found. The unit trust
fund manager can choose from a wide range of investment options, such as the Johannesburg
Stock Exchange, international equities, bonds, derivatives and other financial instruments. You
will be learning about these investment products later in this course. The fund manager’s
decision will be based on the manager’s interpretation of the client’s needs and of market
trends.
The money contributed by the client is measured in units, and the price of the units will reflect
the value of the underlying investment. That sounds more complicated than it is. What it means
is that the price of the unit will reflect the price of the share, bond or other investment in which
the investors’ money (the unit trust fund, in other words,) has been invested. The example given
in the paragraph below should help to clarify this point.
If Unit Trust ADE has invested in very expensive “blue chip” companies, the price of the units
will be higher than the price of units in FGH Unit Trust, which has a spread of low and medium
priced investments. The price of the units varies according to the market value of the
investments.
To explain it simply, the unit trust fund manager acts as the channel through which the investors
invest their money. The investors are clients of the unit trust fund Management Company, and
are probably not known to each other. The idea of a unit trust fund is that it allows the man in
the street to invest his/her money in a range of products. The theory is that the investments
should be spread through a range of financial options, so that if one option loses value, another
will gain in value to compensate for it. This collection of investments is known as an
investment portfolio. Each of the clients of the unit trust fund Management Company will have
an investment portfolio, indicating where his/her shares have been invested.
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Page 17
Some of you may be confused by all of this information if unit trust funds are new to you. Have
a look at the diagram given below, and that should help you to understand the concept of a unit
trust.
How a Unit Trust Fund Works
Investor
Investor
Investor
Investor
Investor
(Pool of Investors)
Investor
UNIT TRUST FUND, MANAGED BY A MANAGEMENT COMPANY
Investment Option,
Investment Option
Investment Option
The aim of the unit trust fund is to create wealth for the unit trust holders or investors. You may
be wondering what is in it for the unit trust fund Management Company. The fund managers
charge entry and administration fees to the client, which provide the income needed to
administer the Management Company. The annual management fee that has to be paid to the
unit trust fund manager is usually between 1% and 2% of the market value of the fund. The
fund managers provide the expertise and the specialised experience to provide sound returns
for the unitholders’ money. The fact that the unitholders’ money is invested in a range of
investment options means that the risk to each unitholder is minimised.
We shall look at an example to illustrate this point. Imagine that you won the sum of R1million
in the lottery, and you decided to invest a quarter of that sum, R250 000,00, in stocks and
shares. You might decide that mining is a good investment option, and so you buy R50 000,00
of shares in one gold mining company. This may not be a sensible investment decision, for if
the price of gold collapses and the value of shares in gold mining companies decreases
dramatically, you will lose a fair portion of your quarter of a million rand. The sensible
investment decision is to buy shares in a variety of industries and a range or products or
services. This means that if the shares in one of the companies in the portfolio lose their value,
there will be others that will soften the blow by either maintaining their value or possibly
increasing in value. As the old saying has it, “Don’t put all of your eggs in one basket!”
Unit trusts work on the principle that spreading your investments through a range of products
will protect the investor’s money better than placing it all in one area of the financial market.
Whereas this would cost a great deal of money if one were investing as an individual, the unit
trust is able to spread the investments by taking a portion of each unitholder's money and
pooling it with others’ money. The Management Company can then create a portfolio or spread
of investments for each unitholder.
Unit trusts are designed to be a form of long term investment. This means that it is unlikely that
you will make money from unit trusts if you buy them in June and then sell them in the following
December. The aim of the unit trust fund is to increase the unitholder’s return on investment
over a long period of time, usually between 3 and 5 years. During this period of time the
unitholder may earn income through interest on the units and through dividends that are gained
from the shares. The unitholder can monitor the progress of his/her investments by reading the
prices quoted in the newspaper every day, or may receive regular updates from the
Management Company.
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Before we go on to look at how the tax laws apply to unit trusts, it might be helpful to look at the
definitions of some of the financial terms that we will be using in this module.
GLOSSARY
Term
Assets
Bond
Buying price
Dividend
Equity
Fund
Gilts
Income
Interest
JSE
Management Company
Money market
Pooling of investments
Portfolio
SAFEX
Securities
Selling price
Trust
Unit
Trustee
Yield
Description
Any property that has monetary value. Personal assets may
include cars, houses, jewellery, and works of art etc, as well as
cash.
A government’s or public company’s promise to pay borrowed
money. It is like an IOU note and may be issued by the
government, municipalities and organisations such as ESKOM, the
Post Office and Spoornet.
The price that a buyer or purchaser will have to pay when buying
stocks or shares
A dividend is a share in a company’s profit. Buying shares in a
company makes the shareowner a partial owner of the company. If
the company makes a profit (after taxation and costs) and decides
to issue dividends, the shareowner will be paid a portion of the
profit. This portion is known as a dividend.
This is simply another name for the shareholding of an individual.
The pool of cash made up of investor’s contributions and invested
in stocks, shares, bonds and interest bearing investments. The
portfolio manager is responsible for running the fund, and choosing
and monitoring the investments the fund makes.
The word “gilt” literally means covered in gold, but in the financial
world it refers to Government stock/bonds. The Government raises
capital for large projects by issuing medium and long term fixed
interest securities. They are regarded as “gilt” because of the low
credit risk associated with the Government. In other words, the
Government is likely to repay the money, so the investment is
secure.
Money received from one’s business, work, investments etc.
Money paid for the use of money that has been lent or charged for
money that has been borrowed
The Johannesburg Securities Exchange. It is the only financial
exchange in South Africa where company equity (or shares) is
listed.
The company that is responsible for the whole operation of the unit
trust, including managing investments, administration and making
sure that legal requirements are met.
Where loans, bonds, stocks and shares are exchanged.
Combining investments of various investors in order to gain more
purchasing power
List of investments held by a company
The South African Futures Exchange. This is where futures
contracts and options on those contracts are listed. It is like the
JSE, except it deals only with futures.
Certificate of stock, document detailing a loan or bond, or a form of
promise or pledge to pay money
The amount of money that the seller will receive when shares are
sold
Association of investors with a nominal owner, in which the funds
are to be used for another’s benefit.
A share of the portfolio issued by the management company. The
value of the unit will change according to the value of the securities
held in the portfolio
A person or group that holds property in trust for another
The earnings on an investment.
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You are probably familiar with some of the terms listed above, although others may be new to
you. They are financial terms and you will come across them frequently in the course of this
module and in the course of your work in insurance.
Before we look at the tax laws that govern the buying and selling of unit trusts, it may be useful
to recap on some of the information we have covered already. The reinforcement of learning
takes the form of a simple consolidation exercise for you to work on.
Unit Trusts and Taxation
Unit trusts are a highly tax effective investment, as the capital growth and dividend income from
the trust are tax-free. The interest income is also tax free, up to the limit of R2000 prescribed by
the Receiver of Revenue.
Advantages of Investing in Unit Trusts
Unit trusts have been a popular form of investment for South Africans for many years. Here are
some of the advantages of investing in unit trusts:
1. They provide an inexpensive way for ordinary people to invest in the markets
2. They allow ordinary people to invest in shares that would be out of their financial reach if
their money had not been pooled with other investors’ in the fund.
3. They have had a history of providing good returns on investment, although the
performance of unit standards has deteriorated over the last few years.
4. They provide a means to beat inflation, as interest and returns have been higher than
the inflation rate.
5. Unit trusts are a flexible form of investment, as you can either invest a lump sum or you
can make a regular investment each month.
6. Unit trusts can be cashed in if necessary, according to the trustholder’s need. In other
words, you may choose to cash in a certain percentage of the unit trust or all of it. This
means that your money is always accessible, which is not the case with many other
long-term investments.
7. They can also be transferred to another party, and you can even invest on somebody
else’s behalf.
8. You can monitor the performance of your unit trust on a daily basis as it appears in the
newspapers’ business reports.
9. Experts in the field of managing money invest your money on your behalf.
10. You can choose a unit trust fund to meet your needs.
11. The first R2000 of an individual’s total interest income in a year is exempt from tax.
12. You will receive regular payments of dividends and interest, which you may accept or
reinvest in the fund.
13. Capital growth on the investments is exempt from tax.
14. You may invest in markets all over the world, and reap the benefits of the exchange rate.
Disadvantages of Investing in Unit Trusts
1. Unit trusts are seen as medium to long term investments, so investors should not expect
to make a profit in the short term.
2. Unit trust charges have been deregulated so unwary investors may find themselves
paying too much to the management company.
3. All investments in securities, including unit trust funds, run the risk that the markets may
collapse and that investors may lose money.
4. The unit trust holder is dependent on the expert judgement of the fund manager, and
there may be cases where the fund manager does not live up to expectations.
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5. The performance of many South African unit trust funds has been disappointing for the
past two or three years, particularly in the equity sectors. In some cases there has been
no capital growth at all, in other words, the unit trust fund has not made a profit, which
means that the investors have lost money.
6. A unit trust fund that is heavily slanted towards one sector may be negatively affected by
changes in that sector.
Unit Trusts and Investment Products
Earlier in the course we looked at how unit trust funds aim to provide a good return on
investment for the trustholders by investing in various financial instruments. In this part of the
course we shall be examining various investment products and comparing them in terms of
investment products and in terms of the risk attached to them. You may find some of the
concepts in this section are new to you. You are not expected to know these products in detail,
but you will be expected to be able to differentiate between them.
Investment Products
a) Bonds: an IOU note issued by the Government, municipalities, or large organisation for
money borrowed. The organisation that issues the bond pays interest to the holder of the
bond and promises to repay the money at a later stage. They are regarded as a sound and
safe investment.
b) Equities: Equities are shares in a company that represent part of the equity or ownership of
the company. The number of equity shares owned by an individual or a unit trust reflects
his/her ownership of the company. The risk attached to the equities can vary from low risk
for blue chip companies, to high risk for others.
c) Derivatives: this is a collective term used for financial instruments such as futures and
options. Derivatives DERIVE their value from another security. They are usually based on
a contract to buy or sell something in the future. This is why you often hear the term “future
derivatives”.
d) Futures: This is an abbreviation of futures contracts. It consists of an agreement between a
buyer and a seller for the sale and purchase of a commodity (product), security or currency
in a specified quantity at a fixed price on a certain date in the future. Derivatives and futures
are medium to high-risk investments.
e) Gilts: A form of IOU from the Government (see pg. 4 for more detail). They are regarded as
a very safe investment.
f) Interest bearing deposits: This is when money is deposited or placed in an account which
will pay interest to the account holder.
g) Money market instruments are short-term debt obligations of governments and companies.
The interest rate on these investments changes from day to day and they are regarded as a
safe investment.
Now that we have looked at the various investment products that are available on the financial
markets, we shall look at how they compare in terms of the risk attached to them, and the
likelihood of a steady income or rapid growth. As you probably know, products that are
associated with rapid growth in value are also usually high-risk investments. On the other hand
the investments that are not likely to increase rapidly in value present a lower risk for the
investor, as they are more likely to provide a steady income.
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Risk Comparison for Growth and Income
LOW RISK
Money market
HIGH RISK
Gilts & Bonds
Unit Trusts
Shares
Futures
INCOME
GROWTH
The table shown above illustrates the principle that the greater the risk to the investor is, the
greater the growth is likely to be. In other words, if you are prepared to take the risk of losing
your money on a fairly unstable investment, you may make a very large profit. However, if the
money that you have invested is your life savings and you have nothing on which to fall back if
the investment is unsuccessful, then you should choose an investment that is low risk, such as
the money market, but will bring you steady returns. It is extremely important that the
Management Company researches the needs of the client and creates a risk profile for him or
her. In this way the Management Company can ensure that the customer is satisfied with the
service that the Management Company is providing.
Growth Rewards
The aim of investing in a unit trust is for the unitlholder to “grow” his/her money. In other words,
everyone who buys unit trusts does so because they want to make more money. How does
one do that? You do it by buying your unit trusts at a certain price per unit, for example, R50,
00, and then selling the units at a higher price (perhaps R75, 00) in the future, thus making a
profit. Generally speaking, the higher the potential for growth in an investment, the higher the
risk to the investor is. For example, if you invest in futures you may make a huge return on your
investment, but if your prediction of the future price is incorrect, you may lose a great deal of
money.
Growth is not the only aim of investors, as many investors are looking for a steady income, in
which case the objectives will be different.
Income Rewards
The unitholder usually receives income from his/her unit trusts during the time that he/she owns
them. If the unit trust has invested in interest bearing products such as gilts, bonds and fixed
deposits, then the unitholder will receive regular payments of interest on those investments.
If the unit trust has invested in equities or shares, then the unitholders will receive dividend
payments from those shares, provided that the company in which the unit trust has invested has
made sufficient profit to declare a dividend. This is a second form of interest for the unitholder.
The unitholder may then decide either to take the interest or dividend payment in cash or to
reinvest the money in the unit trust fund to buy more units for him/herself. The choice is in the
hands of the investor, and the investor may choose the option that best suits his needs.
Summary
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Unit trusts are a popular form of investment for people who cannot afford to risk their money by
investing directly on the Stock Exchange. A unit trust is a fund created by a Management
company in which investors POOL their money in order to invest in various financial
instruments, in order to reduce the risk of loss that may happen if one invests in just one sector.
The unit trust fund usually invests in several areas of the market sectors. The objective is to
provide a fairly safe way for small investors to increase their capital.
The word “unit” in unit trusts is used to describe the amount or measure of an investor’s part of
a unit trust. In other words, the public buys units in the trust fund, and the investors own those
units. The trust is a financial tool that uses experts to manage the investment portfolio on the
owners’ behalf. These experts are known as Portfolio managers, and they are employees of
the Management Company.
A wide range of unit trusts is available in the market, and the investor’s choice of a unit trust will
depend on his/her aim in investing in unit trusts. Some of the unit trusts expose the investor to
higher risk than others do, and in return they may give a better return on investment. When the
unit trust makes a profit, the unitholder will receive a share of the profit in the form of dividends,
as well as earning interest on the investment. Unit trusts invest in equities on the JSE, as well
as in futures, gilts, and other interest bearing investments.
Now that we have looked at what a unit trust is, and how it can be used to make a profit, we
shall move on to look at the different types of unit trusts that are available. The unit trust
industry has grown enormously in the last two decades, and a large number of unit trusts are
available to investors, with many different products within each category. The classification of
unit trusts is carried out by the Association of Unit Trusts in order to;
 Help investors to choose from the different types of funds,
 To make it easier to compare the performance of various funds,
 To differentiate between funds, and
 To make it easier to analyse the different funds.
Later in this module we shall look at geographical classes of unit trusts, in other words trusts
which invest in different geographical areas, but at the moment we shall look at the
classification of unit trust funds according to how the fund or money is invested. Before we do
so, it may be helpful for you to look at the structure of the Johannesburg Stock Exchange, and
the sectors that comprise the JSE.
THE JSE
Main Board
Resource Sector
Development Capital Market
Financial Sector
Venture Capital Market
Real Estate Sector
Industrial Sector
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Classification of Unit Trust Funds
There are 5 broad sectors of unit trust funds, and most of these classes of unit trust funds have
sub-sectors within them as well. We shall look briefly at all 5 classes, and how they differ from
each other:
Fund Sectors
Geographical Categories of Unit Trusts
I.
Domestic Unit Trusts
These invest in the local markets and are the most widely available of the unit trusts. There are
numerous examples of these in the unit trust index in the business section of the newspaper,
and we can take FNB’s Balanced Unit Trust as an example.
II.
Worldwide Unit Trusts
International unit trusts invest in various markets around the world. Foreign Exchange
regulations stipulate that a minimum of 15% of the trust fund must be invested in the South
African market, and a minimum of 15% has to be invested in foreign markets for them to be
considered to be Worldwide unit trusts. The remaining percentage is invested wherever the
Management Company thinks the best investment would be. Some examples of international
unit trusts are Standard Bank’s International Equity Fund and Rand Merchant Bank’s
International Bond Fund.
III.
Foreign Unit Trusts
Unit trusts in this category have a minimum of 85% of their investments outside of South Africa.
An example of this type of unit trust is Liberty’s Global R unit trust fund.
IV.
Regional Unit Trusts
These unit trusts have a minimum of 85% of their investments in a particular geographical
region, such as Japan, Europe or Great Britain. The investor can see by the name of the unit
trust fund where the investments are held. An example of a regional unit trust is Old Mutual’s
UK Fund of Funds or Sanlam’s North American Fund of Funds.
We have now looked at the various categories of unit trusts and classified them according to
where they invest. Now we shall categorise the funds according to HOW and WHERE they
invest money. In this context the “where” does not refer to the geographical area, but to the
financial tools or instruments in which they invest.
There are 4 broad categories of unit trust funds. They are named according to the type of
investment that such a fund would make. The four categories are:
1.
2.
3.
4.
Equities
Asset Allocation
Fixed Interest, and
Fixed Interest funds.
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1. EQUITY FUNDS
Equity funds achieve their objectives by investing mainly in the equity or share market. There
are two sub sectors within this category:
a) General Equity Funds
These funds aim to achieve medium to long term capital growth by investing in a range of
different sectors in the share market. In most cases more than 75% of the value of this type of
unit trust fund comes from the equity or share market.
b) Specialist Equity Funds
As the name suggests, these funds aim to achieve medium to long term growth through
specialising in equities from certain sectors in the share market. This may increase the funds’
exposure to risk, so that they are a medium risk investment.
The sub categories are listed below. See if you can find an example of each of the specialist
funds in the newspaper listings.








Gold Funds – which are funds that invest specifically in the gold and mining
financial sectors, e.g.______________________
Mining and Resources Funds –which invest in the mining and natural resource
sectors,e.g._____________________________
Financial and Industrial Funds – which invest in the financial and industrial
sectors, e.g. ______________________________
Financial Funds – invest in the financial sector, e.g. ____________________
Index Funds – which invest in a specific index (or listing) at the JSE, e.g.
____________________________________________
International Funds – invest internationally as the Exchange Control Regulations
permit. When the fund managers have met the Foreign Exchange limits they will
invest in local companies that are active in other countries and earn much of their
income offshore (i.e. in another country). Current regulations stipulate that no
more than 15% of a Management company’s assets may be invested in the
international sector. Example of an international fund:
____________________________________
Smaller Companies Funds – invest mainly in smaller companies that do not fall in
the JSE Top 40 Index, for example,
___________________________________________________
Specific Equity Funds – are those that invest in specific areas that have not been
mentioned in any of the categories given above, e.g.
__________________________________________
Earlier in this unit standard we learnt about some of the benefits of owning a unit trust – that
they enable the man on the street to invest in the JSE, that they are managed by experts and
that generally they provide a good return on investment. Another benefit of unit trusts is that
their prices are published in the newspaper every day, which enables the investor to monitor the
progress of his/her investment and make any adjustments that may be necessary.
You will find the listing of unit trusts in the business pages of your local newspaper. If you have
access to the “Business Day”, you will find the listing in the Company News section of the
newspaper. You will need to have a sample of the listings in order to work through the next
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section of this course, but it does not matter whether it is today’s newspaper or one that is out of
date.
Look through the listing, and write down the name of an example each of the types of Equity
funds in the space given below. The funds will not be given the generic name that we have
used here, so look for funds that mention their type in their name. For example, you will find
that the Board of Executors has a unit trust product called, “Equity”, which is a general equity
fund.
While doing this activity you will have noticed that the newspaper lists a buying and selling price
for each of the funds. Which of the funds that you found would be the most expensive to buy?
2. Asset Allocation Funds
These funds are also know as “balanced” funds or “managed” funds. Managed funds aim to
achieve medium to long term performance by investing in a combination of markets. This is a
way of decreasing the risk associated with investing in just one market. The markets in which
they invest are the equity market (to a maximum of 75%), the capital and money markets and
the property markets. Their investments in foreign markets are limited to 15% of the fund’s
capital. The aim of asset allocation funds is to provide income rather than growth. In other
words, they are relatively low risk forms of investment. There are two sub-sectors of Managed
Funds:
 Prudential Funds are managed funds that comply with Regulation 28 of the Pension Funds
Act and they comply with the Prudent Investment Guidelines.
Prudential funds aim to provide the unitholder with a steady income, rather than aiming for
growth in the capital.
 Flexible Funds; invest in various categories of assets, according to pre-determined limits set
between the investor and the fund manager. The exact categories will depend on the risk
profile of the unitholder; in other words how willing the unitholder is to risk his/her money for
the sake of reward.
Example of a Managed Fund: _________________________________________
3. Fixed Interest Funds
These funds invest only in interest bearing assets. The level of risk for these funds is relatively
low, but so is the likelihood of enormous growth. The sub sectors of this category are:

Bond Funds, which seek to give investors a good return on investment by
investing only in the gilt and money markets. They are a relatively low risk
investment,

Income Funds, which aim to provide a steady income for the investor and
to give a better return on investment than investing in the money market,
would deliver.

Money Market Funds Money market funds invest in money market
products that mature within a year. The value of these funds usually remains
constant, and they are a low risk investment.
Can you find an example of a fixed interest fund? Hint – they may have the word “income” or
“bond” or “money market” in their name:
Example of a Fixed Interest Fund:______________________________
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Specialised Funds
In addition to these unit trust funds, there are specialized funds regarded as packaged products
that include a number of unit trusts or investment portfolios in one “bundle”. Do not confuse
them with Specialist Equity Funds, which are funds that invest in one specialised area of the
JSE.
They enable the investor to spread his/her investment through a range of unit trusts, and are
also known as split investments. These packaged products include:

Funds of funds,

Wrap funds and

Multi-manager funds
Multi-manager funds differ from the three given above because multi-manager funds do not
invest in unit trusts as such, but in specific investment portfolios. It may sound somewhat
confusing so we shall explore the funds in some more detail.
 Fund of Funds
As you know from the information provided earlier in the course, this is a unit trust fund that
invests in a range of other unit trusts. The unit trusts chosen may originate from the same
Management Company (in which case they would be called an internal fund of funds), or they
may come from outside the Management Company (external fund of funds). Every fund of
funds has to invest in more than two underlying unit trusts.
 Wrap Funds
A wrap fund is a portfolio or collection of investment products “wrapped” into a single product.
The investments made by the fund are not necessarily in unit trusts, although many wrap funds
include both unit trusts and other money market accounts. The combination used in the wrap
fund will depend on the needs of the investor in terms of the risk the investor is prepared to take
and the returns he/she expects to get.
Wrap funds are not controlled by the same legislation as unit trusts and can be managed by
anyone who has registered with the Financial Services Board as a portfolio manager. They are
not considered to be suitable investments for the small investor.
 Multi-manager or Combination funds
A multi-manager unit trust fund invests in a combination of specialist equity and fixed interest
portfolios by bringing together a number of different fund managers into one investment product.
Each of the managers is responsible for his/her portion of the entire portfolio. The portfolio
managers are chosen for their expertise in a particular area, and the combination of the
managers will be tailored to suit the client’s needs. Multi-manager funds are controlled by the
same legislation as unit trust, and therefore offer a high level of protection to the investor.
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These specialised funds charge higher management fees than regular unit trusts, but they may
bring higher returns to the investor if he/she chooses the fund carefully.
Now we shall move on to look at some of the geographical classes of unit trusts. In other
words, we shall categorise the unit trusts according to where most of their investments are
listed. We touched on these earlier, when we were examining the different categories of unit
trusts. We shall look at them in more depth now, and once again you will be looking for
examples of each type!
In the next section we shall be exploring unit trust funds and their value as investments.
Investing in Unit Trust Funds
At this stage you should have an understanding of how a unit trust fund works and of the wide
variety of unit trust funds that are available on the financial markets. The range of types of unit
trust funds ensures that no one has to invest their money in a fund that does not meet their
needs. Later in this course we shall examine the importance of matching the customer’s needs
to the right unit trust. Before we do that, we shall look at the value of unit trusts as an
investment.
First of all we may consider this question;
“What is the difference between saving and investing?”
. of the group. If you are working on your own, you will have to decide what the answer is
without anyone’s help. When you have come up with an answer, think about how your answer
fits in with the possible answer given below.
“Investing can be defined as the creation of more money through the use of capital”1
A more formal definition comes from the Shorter Oxford Dictionary:
“To employ (money) in the purchase of anything from which interest or profit is expected.”
Both of these definitions draw attention to the important difference between saving and
investing. When we save our money by putting it into a bank or building society we do not really
expect to create a great deal of money by doing so. However, when people invest in a new
business, for example, they do so because they expect to make some money from the
investment. Investing nearly always involves some degree of risk, so the choice of investment
is an important one.
Investing in Unit Trusts
Why do people invest in unit trusts? The main reason is that they have provided good returns
to the investor in the past, and they provide the investor with a means of increasing his/her
capital without a huge amount of risk. This does not mean that there is no risk at all associated
with unit trusts, because every type of investment carries risk to a greater or lesser degree. The
amount of risk involved will vary according to the type of investment made, and that is why it is
important that the portfolio manager should find out exactly how much risk the investor can
handle before he/she draws up a portfolio for the client. As a general rule, the more risky the
investment is, the higher the returns MAY be. Those investments that are less risky also
usually provide lower returns.
1
Definition taken from the Association of Unit Trusts course on investment. Pg. 6
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The performance of a unit trust depends on the performance of the financial instrument in which
the trust itself has invested. For example, equity unit trusts, which invest in shares on the Stock
Exchange, will lose money if the share market is collapsing, just as they will increase in value if
the share market is going through a boom. We shall look at the influence of the Stock
Exchange on unit trusts in more detail.
Unit Trusts as a Long Term Investment
If you are looking for a financial instrument that will give you a quick return on your investment,
unit trusts are not for you. The majority of unit trusts invest in securities on the JSE, and
therefore they are affected by market trends on the Stock Exchange. Market trends are
changes in the demand for certain shares or equities that are related to the demand for the
product or service in the market place, or to internal factors within the organisation’s structure.
If you pay any attention to the JSE and follow the price of certain shares, you will see that they
go up and down regularly. This is known as fluctuations in the share price. Of course,
fluctuations in the price of the shares lead to fluctuations in the value of the unit trusts that have
bought shares. However, unit trusts work on the assumption that the price of the shares may
be very volatile or changeable in the short term, but in the long run the value of the shares will
increase.
Volatility is the word used to describe the fluctuations or changes in share prices, and a share
that is volatile is one that is susceptible to changes in the market. The fact that a share is
volatile does not necessarily make it a risky investment, either, for some shares are more
vulnerable to trends than others. Gold shares are considered to be volatile, as the price of gold
fluctuates frequently. However, investing in gold shares may be less risky than investing in
Information Technology shares, for example, as there is a constant demand for gold.
One method of minimising the risks associated with market volatility is to use Rand cost
averaging.
Rand Cost Averaging
Rand cost averaging is based on the principle that if one invests small amounts of money at
regular intervals, the average price that one has paid for units over the long term could be lower
than if one had invested the same amount as a lump sum.
As you know, the price of unit trusts fluctuates on a daily basis. If you look at the graph given
below you will see that the price of this unit trust dropped between Day One and Day Three. If
our investor, Michael, had invested R5000 in unit trusts on Day One, he would have paid 105
cents for each unit in the trust. At that price, Michael would have ended up with 4 761 units
(R5000, 00 divided by R1, 05 = 4 761. However, if Michael had waited until Day Three he
would have found that the price had dropped and he would have paid only 100 cents for them.
This would have given him more shares for the same price, and he would have ended up with 5
thousand units @ R1, 00 a unit.
If Michael had chosen to use rand cost averaging as a payment option, he could divide the
R5000 capital amount into 5 daily payments of R1000 each. If you look at the chart given
below, you will see that rand cost averaging would have enabled Michael to buy more units than
the lump sum payment would have done.
Look at the table below to see how rand cost averaging would work for Michael over a period of
5 days.
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DAY
PRICE IN CENTS
Day 1
Day 2
Day 3
Day 4
Day 5
105
103
100
095
104
PAYMENT IN
RAND
1000
1000
1000
1000
1000
UNITS BOUGHT
952
970
1000
1052
961
Learner Activity
1. Can you calculate what the average price that Michael paid for the units would be?
____________________________________________________________________________
________________________________________________________________How many
units would Michael have bought over the 5-day period with the rand cost averaging method?
____________________________________________________________________________
________________________________________________________________
2. Which method would have been a better investment method, a lump sum or rand cost
averaging? Give at least 2 reasons for your answer.
____________________________________________________________________________
________________________________________________________________
If you have been studying the unit trust index in the newspaper, you will have seen that there is
a selling price and a buying price.
The Selling Price is the price that the Management Company will pay when it buys back unit
trusts from unitholders. It is also known as the repurchase price. It is always written in cents,
not in rands and cents.
The Buying Price is the price at which the Management Company sells units to the public. In
other words it is the price at which the public buys the units. It is the price of the actual unit trust
plus the initial charges set by the Management Company. Like the selling price, it is always
expressed in cents.
Here is an activity for you so that you can study unit trust prices in more detail.
Learner Activity
Draw a graph on which you plot the weekly unit price of:
 A Growth Fund of your choice,
 An Equity Fund of your choice, and
 A Regional fund of your choice.
TIPS
 Use a ruler to ensure that you are monitoring the correct prices for your unit trust,
 Make sure that your graph is quite large so that you have room to plot your prices, and
 Make sure that you are monitoring the same unit trust all week, as many of them have
similar names!
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Unit Trusts and Interest
Unitholders do not only create more money for themselves by buying and selling unit trusts for
profit. As mentioned earlier, unit trusts also provide income for investors through dividends paid
on shares and on the interest paid out on the unit trusts. For the benefit of those of you who
have forgotten what we mean when we talk about interest in connection with financial matters,
Interest is “money paid for the use of money that has been lent, or charged for money that has
been borrowed.”
So, most of us receive interest payments from our bank or building society for the money that
we have deposited in the bank in the form of a savings or current account. That interest is a
payment from the bank for the use of the money that we have deposited with them. On the
other hand, if you have borrowed money from the bank in the form of a home loan or a credit
card, then you will pay interest to the bank for the use of the money that the bank has lent to
you.
The unitholder receives interest on the investment he/she has made in the unit trust fund. This
takes the form of compound interest. Financiers talk about two types of interest, simple interest
and compound interest.
Simple interest is interest that is earned or paid on a fixed amount. It is calculated only once and
is on the principal or main amount of money only.
Now you can work out the simple interest on the amount of R5000, 00. The interest rate in this
example is 10%. Follow the steps given below to find out what the simple interest on that
amount would be;
SIMPLE INTEREST
1. Take the amount of R5000, 00 and enter it into your calculator.
2. Press the Multiply sign on the calculator.
3. Take the simple interest rate of 10% and enter it into your calculator as 10. Then press the
percentage button (%) on your calculator. Write down the amount that appears on your
calculator after you have pressed the percentage button.
4. Take the amount that appears in your calculator and add it to the principal amount of R5000,
00. Press the equals sign (=) on the calculator to get the principal amount plus the interest
that the person who is lending the money will earn.
The Answer
Month 1: R5000, 00 x10%= R5 500,00
Month 2: R5000, 00 x10%= R5 500,00
Month 3: R5000, 00 x10%= R5 500,00.
You can see that the principal amount of R5000, 00 gives a regular simple interest payment of
R500, 00 every month. Therefore the person who lent the money earned R1 500,00 in three
months of having the interest paid to him.
You will see that calculating the compound interest on a sum of money is a little more
complicated, and it is used more frequently in financial institutions.
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Compound interest is calculated on both the principal amount and the interest earned.
With compound interest, the money a person earns in interest becomes part of the principal
amount and ALSO EARNS INTEREST.
We shall calculate the compound interest on the same amount as we did for simple interest,
which is R5000, 00, again using the calculator.
COMPOUND INTEREST
1. Take the principal amount of R5000, 00 and enter it into the calculator.
2. Press the Multiply sign on the calculator (x).
3. Take the compound interest rate of 10% and enter it into the calculator as 10. Press the
percentage button on the calculator (%). Note down the amount that appears on your
calculator after you have pressed the percentage button.
4. Take the amount that you got in the third step and add it to the principal amount of R5000,
00. When you press the equals sign (=) you will have the sum of the principal amount and
the interest, which is R5 500,00.
5. Enter the total that you obtained in the 4th step and enter it into the calculator.
6. Press the multiply sign (x) on the calculator.
7. Take the compound interest rate of 10% and enter it into your calculator as 10, then press
the % button on your calculator.
8. Write down the amount that you found in Step 7, and add it to the principal amount and
press the equals sign (=) on the calculator, to get the principal amount plus the interest that
will be earned for the first month.
The answer at this stage will be R5 500,00 x 10% = R6050, 00.
9. Take the answer from Step 8 and enter it into your calculator.
10. Press the Multiply (x) sign on the calculator.
11. Take the compound interest rate of 10% and enter it into your calculator as 10. Now press
the % button on your calculator. Write down the amount that appears after you have done
this.
12. Now take the amount that you wrote down in step 11 and add it to the principal amount, to
get the principal amount plus the interest that will be earned for the first month.
Answer: R6050, 00 x 10% =R6655, 00.
The difference between simple and compound interest becomes very clear when one compares
the interest calculations over a number of months:
Month 1: R5 000,00 x 10% = R5 500,00
Month 2: R5 500,00 x 10% = R6050, 00
Month 3: R6 050,00 x 10% = R6655, 00.
The amount of money with which we started was R5 000,00. If we compare the amount of
interest earned on that capital amount over the period of 3 month by subtracting R5 000,00 from
the amount at the end of the 3 month period, we can see that the type of interest paid has a
major effect on the amount that is earning interest.
If simple interest is charged, the interest earned is R1 500,00, whereas the compound interest
gives an interest payment of R1 655,00.
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Most unitholders prefer to earn compound interest on their investment, as it pays them more
money that way. The unitholder can choose whether to have the interest paid out or distributed
to him or her, or to have the interest re-invested in the unit trust.
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