Investing in the Stock Market. What is Unit Trust?

In this article we would be explaining means of how individuals can invest in the Stock Market indirectly via Unit Trust Funds.


The Unit Trusts also referred as Mutual Fund has a long and a successful history in many countries.
In Sri Lanka the first Unit Trust was commissioned in December 1991 followed by seventeen funds managed by five unit trust management companies over the years. These five management companies are licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to launch and manage unit trust funds.
These licensed Management Companies over time have gained market experience and performance track record in managing the unit trust funds.

The type of funds initially offered is open ended type of funds and belongs to income, balanced, growth and index categories. Investors in open ended funds can invest and withdraw on a daily basis through the management company. To facilitate the investor transactions, the management company publishes the selling and buying prices of the units based on the marked to market values of the investment portfolio.
More recently closed end funds were launched with 2 5 year maturities comprising fixed income and listed shares in their respective investment portfolios.


Pure fixed income closed end funds have lower risks compared to the higher risk share investment funds.
Unless the management company provided a redemption window in the scheme, the investors in the closed end funds need to wait until the maturity dates to get back their capital invested. Majority of these schemes pay regular dividends to the investors to generate an income during the life time of the scheme.

In September 2009, the industry launched a listed 10 year closed end fund to facilitate common investors to participate in the listed share market and to participate in the growth prospects of the stock market and the underlying companies.

Investors in this type of closed end funds can expect to receive dividends and also have the option to sell the units through the stock market intermediaries.

Moreover, the open ended schemes enable the public to open an account with a licensed management company initially with a small sum of money or with a lump sum.

Depending on the terms of each fund the minimum amount would vary between Rs. 1,000/- and Rs. 10,000/- . Once an investment account is opened, the investor can continue to save as low as Rs.1000/- on a regular basis.

Prospective investors should contact a licensed Fund Management Company (FMC) as to their specific procedures for investment in the funds managed by them. Some of the companies offer switching facilities to move into other funds managed by them.

The switching facility is limited to other open ended funds.

It is important to differentiate between income and equity type of Funds.

The income funds generally pays a dividend and most or all of its money is invested in fixed income instruments such as government and corporate securities.

By nature these instruments gives interest income periodically and the Fund distributes them as dividends.
The equity balanced funds invests in both shares and fixed income securities. These investments generate income from interest, dividends and capital gains from value appreciation from the share investments.

Over a period the investor can expect both regular dividends and potential growth of capital from this fund.
Moreover equity growth funds invest mainly in growth oriented shares and the investors can expect growth in value of their capital from its share investments. Similarly the indexed funds also invest in equities that represent a specific index.

This fund also enables capital growth from its share investments as in the case of a growth fund.
Investors can take advantage from these funds by selecting one or some of these funds to build a diversified investment portfolio to suit their specific financial circumstances.

This approach is useful to build savings for unforeseen future needs for large sums of cash to pay hospital bills, childrens education and retirement needs.
If you have difficulties in identifying suitable funds you should speak to the advisors at the Fund Management Companies to clearly understand the fund parameters in your selection process.

It is also important to realize the comparative tax advantage in unit investments that corporate investors can get against other financial products available to them.

The corporate investors will be liable on interest income at a rate of 35% in the coming year of assessment.
The unit trusts investments have many advantages namely professional management backed by a research team, provides instant diversification thus reducing the risk of investments, convenient administration reducing paper work, offers higher return potential, liquidity: in open ended schemes units can be cashed at net asset related prices, transparency where investors get regular information on the fund's performance and assets held from time to time.
Further unit trusts offers choice of funds to suit your varying needs and the funds are well regulated by the Securities and Exchange Commission of Sri Lanka.

In any Unit Trust the investor's money should be transferred to the Trustee in accordance with the trust deed and Trustee keeps all money received separately for the beneficial interest of the investor.

Once this money is invested Trustees effect payment and receive necessary security and keep under their custody and this process continues until the investor withdraws the investment. Managers keep necessary liquidity to meet these payments.

In Sri Lanka all Trustee and custodian is a Bank and mandated to ensure safe keeping of investors assets in the Trust.

Moreover, Unit trusts are tax efficient and only liable to pay 10% on interest income and dividend income. Gains from sale of listed shares are exempted from this 10% but liable to pay share transaction levy at contract level as any other share investor.

The investor is exempted from tax on dividend income and the fund management company is exempted from deducting the withholding tax on dividends paid to an investor.

Moreover, the stamp duty is waived on issue of units with effect from 1st January 2007. The investors however should consult their tax advisors before their investments in units. The Unit Trust Association of Sri Lanka is an apex body of all licensed Fund management Companies in Sri Lanka.

Source: CSE and Unit Trust Association of Sri Lanka

source - www.dailynews.lk