How Do Unit Trust Investments Work in Kenya?

Do you know that most Kenyans do not have enough savings? According to the Kenya National Bureau of Statistics (KNBS), 54.6% of Kenyans lack enough money to save. 

Worryingly, more than one in every three Kenyans (35%) say they do not have money to invest with about 30% stating they have never heard of securities and do not understand how to invest in securities.

Taking from this snapshot, it is agreeable that if one is able to save consistently, they can plan out their lives with some certainty and gradually grow financially. 

So, how can you save and grow your money simultaneously? One fairly easy way to do so is by investing in unit trust funds.

What are unit trust funds, and should you invest in them? Don’t worry. This article details the nuts and bolts you need to know about unit trusts. 

We cover its pros and cons, the types of unit trust funds to invest in and more. 

Let’s get down to it.

What is a Unit Trust Fund?

A unit trust fund is a collective investment instrument that allows investors with similar investment objectives to pool their money into a fund. These funds are then invested in various opportunities in the market, such as equity, bonds, and other securities.

Unit trusts solve a diversification problem common with many investors - having too many options but little cash. A unit trust helps investors diversify their portfolio by pooling funds from many investors and using them to invest in several asset classes such as stocks, bonds or other money market instruments. All investors benefit from the economies of scale provided by the pooled funds. 

The pooled amount earns an income in the form of interest income, dividends or capital capital gains depending on where it is invested in. As an investor in a unit fund, you are issued with a unit (a portion of the portfolio) according to which you receive a proportionate share of the profits realised. 

In Kenya, unit trusts are regulated by the Capital Markets Collective Investments Schemes Regulations, 2001.

How Unit Trusts Work

Unit trust funds involve four parties:

1. An investor/unitholder who invests in the fund
2. A trustee who safeguards the assets of the funds
3. A fund manager who manages and invests the pooled funds.
4. A custodian approved by the regulator Capital Markets Authority (CMA), typically a bank, that safekeeps the funds and/or assets under the trust. 

The fund manager (usually a company), decides which underlying assets to buy according to the fund’s objectives. They must adhere to a legal contract that sets out the steps of how the manager will invest to achieve the unit trust's objectives.

So, how does a unit trust grow your savings?

Your unit fund investment earns returns via capital gains and dividend payouts.  Capital gains are profits made from the sale of real estate, investment and personal property.

On the other hand, a dividend payment is the distribution of the profits made to all shareholders. 

If you choose the option of reinvesting your annual profits, you can exponentially grow your savings through the power of compounding. This is where the profit you earn in Year A is added to the principal amount and earns a profit in Year B and so on.

What Types of Unit Trusts Funds are there, and what’s the difference?

You can invest in different types of unit trust funds. You need to understand each of them and how they complement your financial goals to know where to put your money.

Each fund has varying levels of risks and returns. They include:

• Money market funds: Have minimal risks but with low returns. Such investments can include short-term money bonds.

• Equity: They have higher long-term returns but with higher risks. They mainly invest in the Nairobi Securities Exchange.

• Balanced funds:  These are a mix of low-risk and high risk-funds. 

• Fixed Income funds: These are investments in interest-bearing securities that include treasury bills, treasury bonds, and approved securities.

• Sector Specific funds: These are funds invested in a specific industry.

Unit Trust Fees

Beware of the costs when investing in unit trusts.  On average, unit trusts in Kenya will charge you an annual management fee of between 2% and 2.5%. It is very important that you are aware of this fee before investing in a unit trust to determine its suitability as a vehicle for your savings. 

Besides these management fees, a 15% withholding tax. Is charged on any interest earned from your investment.

All unit trust management companies are required by law to publish th-eir annual and daily rates in a newspaper to enable investors to monitor performance and compare with other unit trusts. 

Additionally, each unit trust must publish and make available for potential investors a fund factsheet that provides both qualitative and quantitative information about the fund. This includes the fund’s objective and investment methodology, fund manager details, the fund type (asset allocation and whether income is accumulated or paid out), and performance fee details. 

The factsheet is a great way to determine its viability by a potential investor since it reflects the personality of the fund. 

What is Unit Trust Return?

Some unit trusts make a profit by investing in assets the investor manager feels will grow in value. 

If the value of the underlying assets increases, they may be sold for more than when they were bought. As such, the unit fund makes a profit.

Other unit firms aim to deliver returns by investing in assets likely to earn interests or dividends. Others invest in a mix of assets that are expected to earn returns through capital growth and income.

Historical Return Rates of Unit Trusts in Kenya

Unit rates in Kenya offer competitively consistent returns. However, the return rates depend on the unit trust company you’re working with.? Here’s what some of the best-performing unit trusts offer.

ICEA Lion Group Unit Fund

ICEA Lion Group is one of the best-performing unit trust funds in Kenya. You need at least Kshs 10000 to start investing in this fund. It’s very stable and has been around since 2011.The fund has an annualised interest rate of 8.3% .

CIC Insurance Unit Fund

CIC Insurance fund has a good history of performance. They manage almost a third of the unit trust market in Kenya and have at least 20,000 billion assets under management. 

The minimum amount to start investing is Kshs 5000, while the minimal additional fee is Kshs 1000. You can invest in four types of funds:

• Equity fund
• Money market fund
• Balanced fund
• Fixed income fund

It’s money market fund interest in April 2022 is an effective annual rate of 9.01%. However, you will incur an initial fee of 5% and an annual charge of 2%. 

Britam Unit Trust Kenya

Launched in 2006, Britam offers four types of unit trust funds:

• Money market fund
• Equity fund
• Balanced fund
• Bonus plus fund 

 It has over Kshs 1 billion assets under management. What makes it even more appealing is its low investment requirements. You just need Kshs 1000 to invest in their money market fund.  The average interest rate is 8.5-10% per annum.

Ghenghis  Capital Unit Trusts

Ghenghis Capital (GenCap) is licensed by both Capital Markets Authority (CMA) and the Retirements Benefits Authority (RBA) . It offers 5 types of unit trust products.  These include:

• GenCap Hela Fund (Money market)
• GenCap Hazina Fund (Bond)
• GenCap Hisa Fund (Equity)
• GenCap Eneza Fund (Diversified/Balanced)
• GenCap Iman Fund (Sharia compliant)

Cytonn

Cytonn only joined the unit trusts bandwagon in March 2018. Even so, its 11% interest rate is the best in Kenya. 

Advantages of Investing In Unit Trusts

While you can individually buy stocks, bonds and treasury bills, due to the limited amount that is often available to invest, unit trusts offer the following benefits; 

#1.High liquidity

Have you ever experienced the frustration of finding an immediate buyer for an asset you want to sell? Or needing money, but you can’t access your bank account? 

Well, unit trusts allow you to sell your units whenever you want. In most unit trust funds, you can redeem part or all of your units within even 24 hours on a business day and the fund manager will purchase them from you.

This makes unit trusts a great place to stash your emergency fund - you can grow your money in periods of stability and have quick access in case of an emergency.   

#2.Low initial investment amount

Pooling money along with other investors means you don’t need to have lots of money you would otherwise have required to have in order to invest in different asset classes.

With a low initial investment amount, unit trusts expose you to a wide range of asset types that would not have been possible by investing directly in the same assets.

You can open a unit trust fund account with as low as Ksh500 and keep topping up with whatever amount you’d want to keep saving at intervals of your choice - this is true for many funds, but some may have higher minimums than others. 

#3.Professional fund management team

You’ll be pleased to learn that qualified investment professionals manage unit trust fund companies. As such, they are better placed to make profitable investment decisions as compared to investing directly by yourself when you are not as experienced.

Additionally, unit trusts in Kenya are governed by the Capital Markets Authority. As such, you can thus invest in unit trusts knowing your money is in safe hands. 

#4.Broad diversification from a single investment

You can spread your risks among investments that behave differently with a unit trust fund. This means you don’t put your eggs in one basket and suffer significant losses if things don’t work out.

“Diversification is protection against ignorance. It makes a lot of sense if you know what you’re doing.” Warren Buffet.

#5. Automated payments

You can automate your investment by putting a monthly standing order to regularly buy more units. This is the surest way of ensuring regular investing. On the not-so-wise end of the investing spectrum is hoping to invest when you hope you’ll have enough money. 

You’ll probably never!

Disadvantages of Investing in Unit Trusts

Unit trusts also have limitations:

• Fees: You have to pay for trust units and expenses to run the trust even if the funds perform poorly. See the associated fees above. 
• Tax: If you decide to sell your unit shares, you may have to pay capital gains tax.
• Less control:  You have little say on the investment decisions. The fund fact-sheet, however, details the type of securities the fund invests in, so you can make the choice before putting you money at risk. 

3 Essential Factors to Consider Before Investing in Unit Trusts

Here are critical factors to consider before investing in unit trusts.

1. Your risk appetite

As an investor, you're a risk-taker. But how much are you willing to risk? This is where the types of unit trusts come into play. Depending on how willing you are to take risks, you can either choose a high risk fund, a balanced fund or a fixed income fund. Remember, the higher the risk, the higher is the potential return as well as potential loss. 

2. Calculate the cost of Investment

There are additional fees you  may pay based on the amount you invest. They include:

• Management fees: Since your funds are managed professionally, you’ll have to pay some management fees. It ranges from under 1 to 2 per cent.

• Annual trustee fees: You also may have to pay for your funds' administration and custodial management fees.

• Sales charge: This is the fee you pay when buying a unit trust.

• Switching fees: You may need to pay switching fees when you switch from one fund to another managed fund.

The good news is that you do not have to guess whether these fees apply to the fund you are interested in or not. The fund factsheet is supposed to detail all associated fees to enable you to make an informed decision. 

3. The minimum investment amount

This amount depends on the unit trust manager. For instance, at ICEA, you need a minimum of Ksh500 to start investing in unit trusts. If you’re a beginner, you can start slow and gradually increase your investment as you get to know unit trusts better.

Essential Unit Trust Terms to Keep in Mind

• Capital Markets Authority: Unit trusts in Kenya are regulated and licensed by the Capital Markets Authority (CMA) Act Cap 485 A and the Capital Markets Collective Investment Schemes Regulation, 2001.

• Fund Manager: They’re responsible for managing the funds, investment strategy, and trading activities. Always work with experienced and skilled fund managers to avoid incurring losses.

• The Trustee: Trustees are the custodians of the funds. They ensure that the fund manager runs the funds as per the investment strategy and objectives.

• Custodian:  A custodian is a bank or financial institution approved by the CMA to hold and safeguard the assets under management on behalf of the unitholders.

WRAPPING UP

As you have seen, unit trust funds are affordable, easily diversified, highly accessible and liquid. Even of greater importance, unit trust funds are managed by full-time professionals and investment experts, allowing you to invest with peace of mind.

I hope you’ll now make an informed decision when you decide to invest in unit trusts. Keep it here for related content. Have you read our article on how to diversify your sources of income?