The cost of switching to a new unit trust

There are many benefits to investing in a unit trust, but this does not mean profits will continue to stream in. Just like other investments, unit trusts come with risks and sometimes it is best to reassess its value. 

Lianne Lutz, founder of Women’s Wealth, a wealth coaching and financial consultancy for women, explains that a unit trust uses pooled resources of different investors to invest in different financial assets, like shares, bonds, and property.

“The advantage of a unit trust is the wide range of assets which enables a diversified portfolio and it is less exposed to the vicissitudes of the financial market,” says Lutz.

“Unit trusts are managed by a fund management company who have experts specialising in monitoring the market and researching shares to obtain the best returns on investments within a certain timeframe,” she clarifies.

How do unit trusts work?

According to Lutz, this is how the value of a unit trust is determined:

• You invest R10 000 in a unit trust. In return, you receive a number of units, which will be determined by the daily price of the fund on the date of investment.
• Each unit in a unit trust has a particular price which is determined by the value of investments held by the fund.  Depending on the amount invested, you will buy x number of units.  So, for example, if you invest R1 000 and the units bought for R10 each on the date of investment, you will now own 100 units.
• If the unit in the fund is priced at R10 on that day, you will receive 1000 units for your R10 000
• Unit trusts move up and down as the market moves, which means that the value of the unit trust will increase and decrease accordingly.  If your unit price increases to R15, your 100 units will now be valued at R1 500.   If your unit prices decreases to R8, your 100 units will now be valued at R800.

When to move to a new unit trust?

Before switching funds, Lutz believes that the motivation for doing so should be assessed. In other words, is it a strategic, financially objective decision where you stand to improve your returns or is it more an emotional or fear-based response to poor performing units.

“While there is a chance of increasing your returns if you switch to a better performing unit trust, switching means that you remove the opportunity to recover from your losses,” she cautions.

Here are the top things Lutz thinks one should consider before switching funds: 

• Usually only consider switching in response to a change in your financial objectives.  This may occur, for example, if your objectives change from an investment in a long term financial goal to fulfilling a medium-term objective – say you initially took out the investment to grow your money with no particular goal in mind, but as the years went by you made the decision to invest in a property within the next five years, using the money that you have invested. Therefore, you will have to adjust your portfolio accordingly by consulting with a financial specialist who can advise you about the unit trusts which can meet your needs.
• If you are concerned about your unit trust’s performance then you will need to ascertain the cause of this – is it due to a poor performing fund or have there been any changes in the fund management company?
• Various reasons impact on poor performance of a fund. It could be a change in a company management, a poor business decision within a company, a political occurrence that impacts the industry of a specific business or company, or a downward trend in a specific market.
• Do not switch impulsively. Always remember that the fund will go up and down as funds have good and bad cyclical returns. However, sticking with a fund that perpetually underperforms is a bad idea.
• Conduct thorough research before considering switching funds. It is important to consult with a professional in that field to make sure that you are making an informed decision.

What is the cost of switching funds?

Emma Heap, head of retail at 10X Investments, points out that switching funds usually costs little or nothing in additional fees. 

“You may have to pay capital gains tax on the profit you have made and there may be exit fees in unusual situations, such as with some hedge funds, but for the most part it is not an onerous affair at all,” says Heap. 

“Also moving to a different fund can significantly improve outcomes,” she adds. 

Ultimately the cost of changing funds will depend on each unit trust and their particular terms and conditions.

“I am always amazed at how people demand value for money in everything – from sports shoes to gym memberships and mobile phone contracts to mortgages – and yet they will accept any old charges levied on their investments, even paying performance charges when a fund performs worse than an index benchmark,” says Heap.

If a unit trust is not performing well, then switching funds is certainly an option. 

To apply for a new unit trust, click here.