Diversification

Because of the high purchase price of shares, especially the Top 40 on the local stock market, investors with smaller amounts to invest can buy only a handful of different shares. This means their portfolios are not well diversified. What happens if all those shares perform poorly?

Unit trusts consist of a well-diversified basket of shares and other assets, such as listed property. In other words, a unit trust buys a variety of shares and other assets on your behalf. This reduces the risk of all the shares in the basket performing poorly at the same time. There are also unit trusts that invest in more cash-like assets than in shares, for investors who want less exposure to stock market ups and downs.

Investment decisions

When you buy a share, you decide which shares to include and when you want to sell them.

With a unit trust, a team of professional investment managers pick shares and other assets on your behalf and decide when it’s time to sell some of them and buy others.

Costs

Shares have various transaction fees that you need to pay every time you buy and sell a share. There is normally no annual fee for holding a share. Your share-trading platform may charge an annual fee, though.

Unit trusts have annual fees that are deducted from their performance. You can view the net of fee returns on each unit trust fund’s fact sheet, also known as a minimum disclosure document. There are normally no up-front transaction fees or a fee for selling all or part of your unit trust.

Tax

A personal share-trading portfolio and a unit trust currently have different tax rules. When a portfolio manager buys and sells shares inside a unit trust on your behalf, no capital gains tax is triggered. You pay tax only when you withdraw money from your unit trust.

Depending how long you keep a share, you can pay either personal income tax or capital gains tax every time you sell a share in your personal capacity.

Whether you buy the shares yourself or invest in a unit trust that buys shares, dividends tax is deducted from the dividends of those shares. Here, shares and unit trusts are similar.

If either your shares or unit trusts are inside a tax-free account, you won’t be paying any tax, though.

For unit trusts, Smart Invest is a smart choice

If you decide to take advantage of the diversification, professional expertise and tax benefits of a unit trust, Sanlam’s Smart Invest will guide you to choose the fund that’s appropriate for you.