How to choose a unit trust fund

If you are investing for retirement or education the use of unit trust funds as your savings vehicle is a no-brainer. But with more than 1 000 unit trust funds available to you, how do you narrow it down and decide which fund to invest in?

The type of fundThe myriad of unit trust funds on the market can be broken down into different classes (property, shares, cash and bonds) and even further into different types of funds such as those that are Shari’ah-compliant and those that focus on shares that pay dividends.

In order to decide what type of fund you want to invest in, you need to consider why you are investing and take into account your risk profile as well as your existing investments. For example, you might already be invested in property as a landlord and would prefer to invest in a fund that has more equity and bonds exposure. Or you may be investing for income, in which case you should be looking at a unit trust fund that targets dividend-paying stocks.

Your risk profileAll unit trust funds have fund fact sheets, which will tell you everything you need to know about the fund. This includes information about what type of investors would be best suited to the fund and what the fund’s risk profile is. For example, the Allan Gray Equity Fund fact sheet tells you that the fund is most suitable for investors who want exposure to equities, have an investment timeline longer than five years and are prepared to risk losing their capital. When you consider your risk profile, think about your personality and the amount of time you want to invest for. For example, a younger person with a longer investment term can afford to invest more aggressively or in more high-risk funds than an older person because the younger person has a longer time to ride out market movements.

FeesFees tend to eat into your investment returns over time so make sure you are fully aware upfront of all the fees on the unit trust fund you choose. There are quite a few fees you need to ask about:

• An annual fee payable to the fund manager
• A fee that you have to pay your financial adviser if you use one
• A trustee fee
• An administration fee
• Audit fees.

This myriad of fees might sound overwhelming. What you really want to look at is the TER or total expense ratio, which usually refers to all the recurring fees on the investment. TERs are usually 1.5% and lower and you should not be paying more than 1.8% for a domestic general equity fund.

You may also have to pay a performance fee. This is when you pay the fund manager an additional or performance fee in return for exceeding the promised return on the fund. For example, if the fund promises a return of inflation plus one percent and delivers a return of inflation plus three percent, you would pay a performance fee. Check if the fees are in line with those of other unit trust funds and ask how the performance fee is calculated.

Performance returnsWhen you evaluate a unit trust fund, don’t look at the performance of the fund over the past year alone. The fund’s return in the past year could be a result of an uptick in the market, which had very little to do with the actual management of the fund. You should look at the fund’s performance over the last three to five years. A fund that is well-managed will be able to show consistently good performance over the long-term.

Benchmarks are used to determine the relative performance of a fund. For example, the benchmark for the Allan Gray Equity Fund is the FTSE/JSE All Share Index. This tells you that the fund aims to outperform the South African equity market over the long term. Ideally, your return from the fund should outperform inflation over the long term (five to 20 years or longer). It is important to note that the fund return might not outperform inflation in a single year or even three years, which is why you are investing for the long term.

Final wordChoosing a unit trust fund can be quite complicated and this is a long-term decision so it could very well be worth your while to invest in a financial adviser who can help guide you. If you are convinced you can make the choice on your own, make sure you take the time to research the funds and ask the right questions.