If you’re new to investing in South Africa, unit trusts are a great way to start building wealth with relatively low risk and modest amounts of money. They offer a simple, cost-effective way to access a professionally managed, diversified portfolio of assets suited to your financial goals.
What Is a Unit Trust?
A unit trust is a collective investment scheme where many investors pool their money into one fund. This fund is managed by experts who invest in a mix of assets like shares, bonds, and property. When you invest in a unit trust, you buy “units” that represent your share of the total portfolio. The unit price reflects the value of all underlying assets divided by the number of units in circulation.
In South Africa, unit trusts are regulated by the Financial Sector Conduct Authority (FSCA), ensuring transparency and investor protection. There are currently around 1,550 unit trusts registered locally, offering a wide variety of options depending on your risk tolerance and investment horizon.
Why Invest in Unit Trusts?
Unit trusts provide access to professional fund management with the advantage of diversification, which reduces your investment risk by spreading it across various assets. This is particularly valuable if you don’t have the time or expertise to manage your own portfolio. You can start investing with as little as R500 per month, making it affordable for most South Africans.
Another benefit is flexibility. You can invest lump sums or make monthly contributions, and you can switch between funds within the same management company without incurring significant fees. This allows you to adjust your investment strategy as your financial goals or risk appetite change.
Types of Unit Trusts in South Africa
Unit trusts are categorized based on their asset allocation and geographical focus. For example, balanced funds invest in a mix of equities and bonds, while equity funds focus primarily on shares and are suitable for long-term growth. Money market funds invest in low-risk, short-term instruments, ideal for conservative investors or short-term goals.
South African unit trusts must invest at least 60% in local assets, but many also include international exposure, up to 30%, to diversify and potentially enhance returns. The Association for Savings and Investment South Africa (ASISA) groups funds into categories to help investors compare similar products.
Costs and Taxation
Unit trusts in South Africa typically have lower fees than direct investing because the pooled funds benefit from economies of scale. Fees include an annual management fee and possibly a performance fee, but these are usually transparent and disclosed upfront.
Regarding taxes, unit trust investors pay income tax on interest, rental income, and foreign dividends earned by the fund. Dividends from South African companies are subject to a 20% withholding tax. Capital gains tax applies to profits when you sell your units, with 40% of the gain included in your taxable income at your marginal tax rate, which can be as high as 45% for top earners.
To reduce tax, South Africans can invest in tax-free unit trusts, which allow up to R36,000 per year and R500,000 over a lifetime to grow completely tax-free. This option is ideal for long-term savings without the burden of tax on dividends, interest, or capital gains.
How to Get Started
To begin investing in unit trusts, you can open an account with major South African financial institutions like FNB, Standard Bank, Discovery, or investment platforms such as EasyEquities and 10X Investments. Many offer online access and educational tools to help you choose funds that align with your goals.
Before investing, consider your investment horizon and risk tolerance. Balanced funds are often recommended for medium-term goals of 3-5 years, while equity funds suit longer horizons of 7-10 years or more. Remember, unit trusts are best viewed as long-term investments to ride out market fluctuations and maximize growth.
Unit trusts provide an accessible, regulated, and flexible way for South Africans to grow their savings with professional management and diversification. Starting with a small monthly contribution can set you on a path toward financial security.
