[2007-09-03]  Entering the Markets As an Investment Option
As part of a balanced portfolio of investments, investing in the stock market is a wise thing to do. However, most individual investors lack sufficient resources to invest a large amount of money at one time, in order to maximise returns while minimising risks. And even if one were to be wealthy enough to make such investments, one often lacks the discipline to consistently study the markets.

Unit trusts can provide a simple, diversified, entry into the stock market. The presence of unit trusts, which pool large numbers of individual investors' funds, certainly makes it easier to make such investments.

However, it does not completely remove the need to decide upon what one wishes to invest in, what one's risk profile is, etc. In sophisticated markets, there are a host of unit trust (also known as Mutual Funds) options. One can choose a general equity fund. Specialised funds focus on specific stock sectors.

Others have a geographic focus (in countries where offshore investments are allowed). Some funds are termed aggressive funds - they offer the potential for high returns, but carry the risk of significant capital loss. Others are more balanced; while others are more conservative - they attempt to limit the volatility of the investment, but could limit the upside (return) of a significant bull run.

Unit trusts do not only have to invest purely on equities. There are also bond focused unit trusts; property unit trusts and balanced funds exist. Some funds are actively managed - attempting to beat a specified benchmark.

How to choose

The choice of unit trust depends on a number of factors. One's age at the time of investing, and the time horizon pertaining to the investment, are important considerations. If one is of advanced years, or the investment is earmarked for expenditure in say the next two years, then an investment in a risky sector of the stock market - or in the stock market at all - is probably unwise.

Although equity markets have, over the long-term, i.e. decades - generally performed better than other investments, this does not necessarily hold true for a period of up to say five years. In such a time frame, it is possible that one could do better investing in a Bond Fund or Property Income Fund.

One's attitude to risk is an important consideration in deciding. It is a strange quirk of human nature that many people are extremely upset at losing say 10 percent of their portfolio - more upset at such a loss than would be compensate by the good chance of say a 40 percent growth in one year. For such people then, investment in an aggressive unit trust is not advisable. For such people, investment in a Money Market Unit Trust, a Bond Fund, or a Blue Chip Unit Trust, would be the best.

Blue chips are those well-known, safe, and long-existing companies on the stock market. In Uganda Stanbic Bank Uganda Limited would be one such company. It sells a product that has a relatively stable demand profile, is managed by a trusted management team, and has built up a solid track record over a number of years.

People with a larger appetite for risk - or those with more wealth - may be more willing to risk investing in a unit trust with a risk of significant capital loss, but that has a commensurate chance of a substantial capital appreciation in a short period.

Such more risky unit trusts could include ones that focus on commodity-related firms or companies that are relatively new, but are expected to grow rapidly.

Although timing one's investments is not generally advised, those who feel that they can read the market, could be tempted to invest at what they perceive to be the bottom, and sell out near the top, of the commodity equity cycle. New firms may indeed have good growth prospects.

Imagine what an investment of $1,000 in Microsoft in the early 1980s would now be worth - even after the bursting of the tech bubble. However, the failure rate among newer firms is higher than the average. So investment in a unit trust with high exposure to such growth stocks could be more risky.

Past performance

Many choose unit trusts on the basis of past performance. This could prove to be a winning strategy. However, it is best to use past performance as only part of the decision process.

It is better to look at unit trust companies that share one's broad investment philosophy. Are they conservative? Has there been stability in the professional team? Does their history show steady growth in an investment over a reasonable benchmark (say five years)? A one-year spectacular return could portend good things; in many cases, however, it could be followed by mediocre returns.

Just as one would spend some time and effort in comparing cars before choosing what to buy, the same with unit trusts. What do I need out of my car? A family saloon? A flashy sports car? Value for money? Dependability? The same with unit trusts - is it for retirement funding? Funding of education? For growth in one's early years? Or is it to provide for income in one's golden years?

One could use a professional to assist in making such decisions. In this regard, readers could contact a local financial adviser or the Stanbic Investments office at Crested Towers and gather as much info prior to selecting which unit trust will best suit your particular wealth requirements. Investments in unit trusts should be viewed as a medium to long-term investment (over three - five year periods).

It is also worth every now and then to decide on one's financial goals, and assess performance.


Source: Copyright © 2007 The Monitor.