Your investment in a unit trust fund can grow and make more money for you in one of three ways:
1. Capital gains
When you invest in a unit trust, you buy units based on the current value of the underlying shares, bonds, listed property or cash held in the fund and apportioned into units.
The units are valued in line with the price in the market of these securities and that value is called the net asset value (NAV) price. Read more: How are your units in a unit trust fund priced?
When you sell your unit trust, if the price of those instruments – other than the cash – and hence the NAV has gone up, you will make a capital gain. If you stay invested for the suggested investment period, in most cases you should make a capital gain, although there is no guarantee.
You could also make a capital loss if the price of the shares or bonds or other securities in which you have invested, and hence the NAV price of your units, has fallen below the price at which you bought.
Even if the price is just a little bit above where it was when you bought, you could still realise a loss because of the costs that have been deducted from your investment.
When the price of your units drops below your original purchase price or below what you earned over a previous quarter or year, remember that you will only realise a loss if you sell your units at that point. If you can wait for your investment to recover, your loss will be “on paper only” – only on your statement for that period.
2. Dividends
If your fund invests in shares, you may earn dividends from those shares. The companies in whose shares your fund has invested will declare some of their profits or reserves as dividends and pay these to shareholders at regular intervals.
Some companies hold back some of their profits to reinvest in the company, or to see the company through an anticipated tough trading period.
Before paying the dividends, the company will withhold dividends tax to pay to the revenue authorities (the South African Revenue Service for South African companies).
After deducting the tax, a unit trust fund will divide the dividends it receives among the unit holders and distribute these on a predetermined day.
Funds can choose to distribute dividends monthly, quarterly, biannually or annually.
When you invest, you can choose to have these dividends paid to your bank account or reinvested in your fund. If you reinvest, the number of units you own will increase.
3. Interest
Interest is the fee a borrower pays for using someone else’s cash. Unit trusts invest in a variety of contracts that bind borrowers to pay interest. The borrowers may be banks, companies or the government and the terms of the loans vary considerably.
Funds in the fixed-interest categories, such as money market funds, bond funds and income funds, as well as multi-asset income funds, invest more heavily in interest-earning contracts or instruments and so they pay investors more interest than equity funds do.
Every fund has some money invested in cash so that it can pay investors who want to withdraw. The cash holding will also earn interest.
When your fund receives interest on fixed-interest instruments, it divides the amount received among the unitholders and pays it out monthly, quarterly, biannually or annually.
You can choose to reinvest the interest due to you and it will then be used to buy you additional units.
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