Investing in the Stock Market
What is Unit Trust?
In this article series we discussed about how an individual can
invest in the Stock Market by purchasing securities of listed companies.
In this article we would be highlight how individuals can invest in the
Stock Market indirectly via Unit Trust Funds.
The Unit Trusts also referred as Mutual Fund has a long and a
successful history in many countries. In Sri Lanka the first Unit Trust
was commissioned in December 1991 followed by seventeen funds managed by
five unit trust management companies over the years. These five
management companies are licensed by the Securities and Exchange
Commission of Sri Lanka (SEC) to launch and manage unit trust funds.
These licensed Management Companies over time have gained market
experience and performance track record in managing the unit trust
funds.
The type of funds initially offered is open ended type of funds and
belongs to income, balanced, growth and index categories.
Investors in open ended funds can invest and withdraw on a daily
basis through the management company. To facilitate the investor
transactions, the management company publishes the selling and buying
prices of the units based on the marked to market values of the
investment portfolio.
More recently closed - end funds were launched with two - five year
maturities comprising fixed income and listed shares in their investment
portfolios. Pure fixed income closed - end funds have lower risks
compared to the higher risk share investment funds. Unless the
management company provided a redemption window in the scheme, the
investors in the closed end funds need to wait until the maturity dates
to get back their capital invested. The majority of these schemes pay
regular dividends to the investors to generate an income during the life
time of the scheme.
Last month the industry launched a listed 10-year closed end fund to
facilitate common investors to participate in the listed share market
and to participate in the growth prospects of the stock market and the
underlying companies. Investors in this type of closed end funds can
expect to receive dividends and also have the option to sell the units
through the stock market intermediaries.
Open ended schemes
The open ended schemes enable the public to open an account with a
licensed management company initially with a small sum of money or with
a lump sum. Depending on the terms of each fund the minimum amount would
vary between Rs. 1,000 - Rs. 10,000. Once an investment account is
opened, the investor can continue to save as low as Rs. 1,000 on a
regular basis.
Prospective investors should contact a licensed Fund Management
Company (FMC) as to their specific procedures for investment in the
funds managed by them. Some of the companies offer switching facilities
to move into other funds managed by them. The switching facility is
limited to other open ended funds.
It is important to differentiate between income and equity type of
Funds. The income funds generally pays dividend and its most or all of
its money is invested in fixed income instruments such as government and
corporate securities. By nature these instruments give interest income
periodically and the Fund distributes them as dividends. The equity
balanced funds invests in shares and fixed income securities.
These investments generate income from interest, dividends and
capital gains from value appreciation from the share investments. Over a
period the investor can expect regular dividends and potential growth of
capital from this fund. Moreover, equity growth funds invest mainly in
growth oriented shares and the investors can expect growth in value of
their capital from its share investments. Similarly the indexed funds
also invest in equities that represent a specific index. This fund also
enables capital growth from its share investments as in the case of a
growth fund.
Corporate investors
Investors can take advantage from these funds by selecting one or
some of these funds to build a diversified investment portfolio to suit
their specific financial circumstances. This approach is useful to build
savings for unforeseen future needs for large sums of cash to pay
hospital bills, children education and retirement needs.
If you have difficulties in identifying suitable funds you should
speak to the advisors at the Fund Management Companies to clearly
understand the fund parameters in your selection process.
It is also important to realize the comparative tax advantage in unit
investments that corporate investors can get against other financial
products available to them.
The corporate investors will be liable on interest income at a rate
of 35 percent in the coming year of assessment.
The unit trusts investments have many advantages namely professional
management backed by a research team, provides instant diversification
thus reducing the risk of investments, convenient administration
reducing paper work, offers higher return potential, liquidity: in open
ended schemes units can be cashed at net asset related prices,
transparency where investors get regular information on the fund's
performance and assets held from time to time. Unit trusts offer a
choice of funds to suit your varying needs and the funds are well
regulated by the Securities and Exchange Commission of Sri Lanka.
In any Unit Trust the investor's money should be transferred to the
Trustee in accordance with the trust deed and Trustee keeps all money
received separately for the beneficial interest of the investor.
Once this money is invested Trustees effect payment and receive
security and keep under their custody and this process continues until
the investor withdraws the investment. Managers keep liquidity to meet
these payments. In Sri Lanka all Trustee and custodian is a Bank and
mandated to ensure safe keeping of investor's assets in the Trust.
Share transaction levy
Unit trusts are tax efficient and only liable to pay 10 percent on
interest income and dividend income. Gains from sale of listed shares
are exempted from this 10 percent but liable to pay share transaction
levy at contract level as any other share investor. The investor is
exempted from tax on dividend income and the fund management company is
exempted from deducting the withholding tax on dividends paid to an
investor.
The stamp duty is waived on issue of units from January 1, 2007. The
investors, however, should consult their tax advisors before their
investments in units.
The Unit Trust Association of Sri Lanka is an apex body of all
licensed Fund management Companies in Sri Lanka.
Source: CSE and Unit Trust Association of Sri Lanka
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