Hopeton Morrison, ContributorIncreasingly, many Jamaicans are investing in pooled funds such as unit trusts and mutual funds. Both investment vehicles pool money from many investors which accounts for the term collective investment schemes.
This pool in turn creates considerably greater buying power for the smallest investor in the pool, than he/she would have under normal conditions. These schemes are usually more suitable for the small investor, because of their relatively low expense, their liquidity (meaning that buyers and sellers can either purchase or dispose of their units quite easily) and their diversification into a mix of different asset classes.
Understandably, a question frequently asked is whether mutual funds and unit trusts are one and the same as the terms are generally used interchangeably. There are indeed a few technical differences between them.
First of all, unit trusts hold securities to maturity which the trust expected to dissolve when most of these securities have matured. Unit trusts should have a fixed termination date, but in Jamaica and in some other jurisdictions the practice is for these funds to reinvent themselves on maturity and therefore to carry on indefinitely.
A second difference is that mutual funds are actively managed portfolios, and for this the fund charges a fee. On the other hand unit trusts are actively bought and sold and the difference between both charges computed as the brokers commission, used to cover the overhead expenses of the trust.
Mutual funds and unit trusts are excellent investment tools, but here are some precautions for you to take:
Mutual funds are classified as load funds or no-load funds. A load is a commission or one time fee. This is levied in addition to the annual management fee which varies anywhere from less than 1 per cent to 5 per cent or more. Loads are sometimes taken as soon as you buy into the fund (front end load) or when you sell (back end load). If you can, seek out funds with no-loads and that settle for low fees.
A critical consideration is the question of past performance as a measure of the fund's or unit trust's performance going forward. Be very careful here however as past performance does not predict future returns.
Spend the time to read the fund prospectus. Seek clarification from a licensed investment advisor where necessary.
Be wary of fads. All the research in personal finance supports this notion that investors tend to move with a herd mentality. Chose to be a contrarian and do your own independent research and analysis.
