Unit trusts, otherwise known as Collective Investment Schemes (CIS) do just as they say; pool funds together for investment. What is not obvious is why they should be an essential part of everyone's investment portfolio. In this 2-part series, we explain why Unit Trusts make for a safe, low-barrier, and high-rewarding means of investment.  

While CISs in Uganda have been operational since the mid-90s, they have only gained momentum over the past six years with greater sensitization and today have a unit value of UGX 1.4 trillion invested in capital market instruments. Despite this, a minuscule, precisely 0.1% of Uganda's 19,000,000 income earners utilize CISs as part of their larger saving and investment strategy.  

As the leading tech provider of personal investment management services to over 20,000 investors - 3/4 of collective investors in the market - XENO is aware that most Ugandans are oblivious to the benefits of using a Unit Trust Fund to grow their wealth.  

Here are four reasons you should start investing in a Unit Trust Fund today and begin growing your own little nest egg.  

1. Unit trusts give you a passive income 

Investing your funds in a unit trust is one of the easiest ways to earn an income from your savings. Compare it with what most people do: save their money in a bank account, or invest in an income-generating business. Unit Trusts champion these common solutions because they earn a higher passive income over the interest rates at your local bank account where your money sits idly. Businesses, on the other hand, demand an active role from the investor including time, know-how to make strategic market decisions, high financial requirements, management, etc. for the fighting chance that it will produce a return on investment.  

With a Unit trust fund, your financial goals are achieved through one key individual action of your own: small consistent, or lump sum investments. The rest of the work, namely strategic fund allocation into interest-earning assets which compound your earnings daily is delegated to the fund manager of your choice. This frees you up to focus on monitoring the performance of your investments and guide your manager where the need arises.  

2. Unit trusts offer you risk-sensitive options

All investments have an aspect of risk, anything that says otherwise requires serious scrutiny. This is because risk is the price paid for making your money work to return a profit. Even decisions like choosing an education have risks involved. You pay to go to university with the hope that it will increase your chances of getting employed, at the risk of the job market saturating, or an economic downturn cutting jobs. In financial markets, high returns are almost always paired with high risks and vice-versa.

You may wonder then if the risk is unavoidable, is there room for risk-averse investors? Absolutely, in fact, data shows that most people are averse to risk, particularly of the financial type. Fund managers with diversified trusts can offer investors access to low-risk investment vehicles like treasury bills and bonds in exchange for conservative returns: 9% – 12% interest on average in Uganda or higher-promising but fluctuating returns from equity markets for investors with high-risk profiles.

Licensed Unit trusts are guided by the regulatory approach to assess an investor's risk appetite before they can advise them on an appropriate investment strategy. This kind of financial advisory support is rarely afforded to people embarking on an investment.

3. Unit trusts give you liquidity 

Most experts agree that investing is a long-term game. You are assured of multiplying your seed investment if only you are patient enough to wait for the five or even 10 years required to see it through to maturity. 

In an ideal world, we would love to give our investments plenty of time to grow. However, just the past few years of a global pandemic that not only dried up income streams but drove up the cost of medical care and sudden fatalities, the lack of access to our finances tied up in long-term investment schemes, made holding on to hard assets i.e property unattractive. 

Imagine having to liquidate land, or trees just to be able to raise hospital bills. This period has taught us the need to diversify our investments to include assets that support liquidity. Unit trusts, in comparison to other investment products in the financial markets, offer just that. With no restriction on maturity or the amount you can withdraw, unit trusts allow investors to grow their savings and liquidate them within a few working days.  

4. Unit Trusts are structured for security

Speaking at an NSSF Financial Literacy session, Dickson Sembuya, the Director of Research and Market Development at the Capital Markets Authority highlighted why what Unit Trust Fund Managers do is just as important as what they don't.  

Unit trust funds operate under the license and regulation of the Uganda Capital Markets Authority. In this system, fund managers like XENO Investment Management are the customer-facing entity responsible for helping investors structure and implement their investment strategies. What fund managers don’t have is access to investor assets which are held by a custodian, typically a bank.  

“The way the whole system is organized is to spread out risk and have investor protection.” said Dickson during the session. Other parties in the system include trustees who on behalf of investors are holders of the assets. This system makes investing in Unit Trust Funds a regulated and transparent activity.  

So all this sounds great. Does this mean you should invest all your resources in unit trusts? Not exactly. Any good financial advisor would caution you to diversify your portfolio. Collective investment schemes offer a great way to put idle funds to work. These are monies that are not actively at work - for example, they are not paying your rent, or covering your daily living costs. They are savings you are accumulating for a specific goal or idle profits from your business that could be invested and gathering interest.

We recommend you diversify your investment portfolio with Unit Trusts alongside active investment options like seeding ventures or running businesses. Experts advise that this kind of diversification spreads out your risk and liquidity to help you manage different financial needs.  

Feel like you are ready to start? Learn more about goal-based investment.

Stay tuned for Part 2.