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Investing in Unit Trusts: What You Need To Know

Navigating diverse investment tools can be perplexing for the average investor. Investor education is crucial as knowledgeable and empowered investors contribute towards a vibrant market. Unit trusts are one of many investment options available to investors. The following explores the mechanisms and types of unit trusts in the Sri Lankan market.

Understanding Unit Trusts

Think of a unit trust as a pooling vehicle, where you gather relatively small investments from a large number of investors to make one large fund. This pool of funds is then invested in different financial instruments. The income earned from these investments is shared by the respective unit holders in proportion to the number of units owned.

A unit trust and portfolio of investments is typically overseen and managed by a professional Fund Management Company while an independent trustee maintains custody over all the assets. The minimum amount for investing in a unit trust can be as low as Rs. 1,000 depending on the Fund.

How Unit Trusts Differ From Other Investment Tools

The biggest advantage that unit trusts offer is the diversification to a portfolio of investments, which an individual without a large base of savings will otherwise not be able to obtain on his own. A diversified portfolio has investments in a number of companies, thereby reducing risk while enhancing returns. Because of a large fund base, the asset manager will also be able to negotiate better rates, getting a higher return on his asset pool while bringing in economies of scale.

The management expertise and knowledge of the asset manager is also an added benefit of a unit trust, making it less time-intensive for the investor. An experienced fund manager will be more aware of interest rate movements and know how to minimize risk, generating higher risk adjusted returns over the long term.

The Role of Trustees and Regulators

When investing in a unit trust, investors are assured of the active involvement of regulatory bodies and a high level of transparency. An independent entity is appointed as trustee and maintains custody of the Fund’s assets, representing the interests of the investors. Moreover, the trustee monitors transactions carried out by the Fund on a daily basis. Financial statements are circulated regularly to investors which provide details of the Fund’s progress and statement of financial performance. The Securities and Exchange Commission of Sri Lanka (SEC) licenses and regulates unit trust funds, conducts periodic on-site audits, and rigorously examines the qualifications of fund managers.

Types of Unit Trusts

There are different Unit Trusts, each addressing a specific investment requirement. No single Unit Trust will cater to the requirements of all investors. It is the Asset Manager’s role to match a specific fund to an investor’s requirements. The main types of Unit Trusts in Sri Lanka are Income Funds, Money Market Funds, Gilt Edged Funds, and Equity Funds.

Income Funds invest in income generating investments such as government securities, debentures, commercial papers, structured debt instruments, and even bank and finance company fixed deposits. These funds are suitable for medium to long term investments, for income generation and capital growth. A well-managed Income Fund will generate higher returns over the long term than equivalent bank or finance company deposits.

Money Market Funds make similar investments to Income Funds, except that all investments mature within one year. As a result, the return on Money Market Funds is lower but its attraction is its high level of liquidity. They are good substitutes for savings accounts as your investment can be withdrawn at any time.

Gilt Edged Funds restrict investments to securities issued by the Government of Sri Lanka. Government Securities are widely considered risk-free instruments and are suitable for investors wishing to eliminate all default risks associated with an institution. They are the safest investments in terms of payment of underlying principal and interest when due. However it must be noted that Government Securities carry ‘interest rate risk’ and the value of instruments rise or decline based on interest rate changes.

Equity Funds invest primarily in shares listed on the Colombo Stock Exchange. Investments in listed shares have higher risks than investments in fixed income instruments and they can be expected to yield higher returns. They are long-term investments – ideally an investor should have a 5-10 year investment horizon in mind when investing in an Equity Fund.

Sri Lanka’s Unit Trust Industry

Unit Trusts were introduced to Sri Lanka in 1991 to provide an alternate investment for people to benefit from the capital market. The SEC as the licensing authority has the power to permit a Fund Management Company (Fund Manager) to launch a unit trust under the SEC Act.

There are currently 14 Unit Trust Management Companies in Sri Lanka operating a total of 75 funds as at 31 January 2015, while assets under management in the entire market have grown to Rs.126Bn as at 31 December 2014. The Unit Trusts Association represents the industry to the SEC, the Government and CBSL.

It also strives to maintain high professional and ethical standards in the Unit Trust Industry and disseminate information to existing and potential investors about Fund Managers, performance of current funds and the process of investing in Unit Trusts.

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Note

This article is a part of First Capital Holdings PLC’s Investor Education Series. The Investor Education Series is aimed at improving investment education and financial literacy in Sri Lanka and enabling investors to make informed decisions about investments and the financial market and is not an endorsement of specific products.

About the Writer

Dinesh Fernando – Senior Manager First Capital Asset Management Limited

Dinesh Fernando has over 20 years’ experience covering a wide range of financial service businesses including fund management, research, investment banking, commercial banking, and project financing. Prior to joining First Capital he was the fund manager at one of Sri Lanka’s oldest unit trust management companies. Dinesh is a CFA Charterholder.

Maximise your Dollar Investment

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US$ 150 Million Sri Lanka Development Bond issued by the Government of Sri Lanka

  • Risk-free
  • Tax-free
  • Higher rates than bank deposits

Maturity period – 3 months, 6 months, 1 year and 2 years

Eligibility criteria 

  • Foreign Citizens & Entities
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  • Non-Resident Foreign Currency (NRFC)
  • Resident Foreign Currency (RFC)
  • Resident Non-Nationals’ Foreign Currency (RNNFC)
  • Foreign Exchange Earners’ Accounts (FEEA)
  • Licensed Specialized Banks
  • Licensed Finance Companies
  • Authorized Dealers in Foreign Exchange
  • Primary Dealers in Government Securities
  • Board of Investment of Sri Lanka Approved Companies
  • Specified Insurance Companies

Contact – First Capital Treasuries PLC +94 11 2 639881 | +94 11 2 639889 for subscription.

Gilt Edged Fund

UNIT TRUSTS
FC UNIT TRUSTS

The First Capital Gilt Edge Fund invests exclusively in government securities (treasury bills and bonds) issued by the Central Bank of Sri Lanka which are default risk-free instruments. It provides a tax-free income and offers you the option of withdrawing your investment at any time.

The Unit Trusts Funds are managed by First Capital Asset Management Limited a subsidiary of First Capital Holdings PLC, a full service investment bank rated A- and listed on the Colombo Stock Exchange.

First Capital Asset Management Limited is regulated by the Securities and Exchange Commission of Sri Lanka, while the Bank of Ceylon acts as the trustee and custodian of the funds.

First Capital Money Market Fund

UT Money Market Fund

First Capital Money Market Fund is an open-ended fund that invests in corporate debt and government securities which mature within one year. The fund  is a good substitute for savings accounts and short term fixed deposits. The fund gives higher tax-free returns on your investment with the flexibility of withdrawing your investment at any time.

The Unit Trusts Funds are managed by First Capital Asset Management Limited a subsidiary of First Capital Holdings PLC, a full service investment bank rated A- and listed on the Colombo Stock Exchange.

First Capital Asset Management Limited is regulated by the Securities and Exchange Commission of Sri Lanka, while the Bank of Ceylon acts as the trustee and custodian of the funds.

First Capital to tie up with Japan’s 14th largest Musashi Securities

stock brokers in sri lanka

First Capital Holdings Plc CEO Dilshan Wirasekera (right) shakes hands with Japan’s Musashi Securities Managing Director Yoshitaka Harada while First Capital Equities CEO Jaliya Wijerathne and Musashi General Manager Sales and Planning Department Hiroshi Nomoto look on – Pix by Lasantha Kumara 

First Capital Holdings Plc is firming up arrangements to establish a formal tie up with Japan’s 14th largest in the industry Musashi Securities Ltd., to promote inward investments in to Sri Lanka’s capital markets.
Recently Musashi Securities Managing Director Yoshitaka Harada and General Manager Sales Planning Department Hiroshi Nomoto were in Colombo on a fact finding visit as well as meet with relevant Government officials and private sector firms.

Musashi is the first brokerage to introduce the Sharia fund in Japan. It is a member of the Tokyo Stock Exchange, Osaka Stock Exchange and Nagoya Stock Exchange and Japan Securities Dealers Association.

Harada said Musashi has at present around Japanese Yen 2 billion invested in South Asia, primarily in India, Pakistan and Bangladesh and a small amount in listed Lankan securities made in the past.

“Under a formal tie up with First Capital, we are hoping to have a great engagement,” Harada emphasised.

Encouraged by better understanding of improved political and economic climate as well as future prospects, Musashi will develop a strategy to increase awareness and education on Sri Lanka among Japanese investors, especially retail.

“Recent political, socio-economic progress in Sri Lanka is very good. Since this is my first visit, I must admit it is better than I expected. We see improved future prospects. Overall our confidence on Sri Lanka has strengthened,” said Harada during the interview along with First Capital Holdings CEO Dilshan Wirasekara.

However he pointed out that liquidity levels in the Colombo Stock Exchange must be enhanced if Sri Lanka is to attract a larger pool of Japanese investments. Nevertheless Musashi was pleased with the CSE’s offering of diverse sectors for investments. “We find valuations of several blue chip companies very attractive,” Harada added.

Musashi will also explore future issues of Sri Lanka Development Bonds and Government securities. “Improved credit rating will ensure a greater inflow of Japanese investments,” he added.

First Capital Holdings PLC is the holding company of the First Capital Group offering a full range of investment banking products and services, through subsidiaries operating in debt and equity markets. The Group comprises of First Capital Treasuries, a Primary Dealer licensed by the Central Bank; First Capital Asset Management, an Investment Manager licensed by the Securities and Exchange Commission of Sri Lanka which also manages several dedicated fixed income Unit Trusts; First Capital Equities a licensed Stockbroker and Member of the Colombo Stock Exchange; First Capital Markets, a licensed Margin Provider and First Capital Ltd., a structuring and placement agent for debt and equity, and provider of corporate finance and advisory services.

For nearly 30 years, the First Capital Group has been a leading non-bank financial institution in Sri Lanka. A pioneer Primary Dealer in government securities, First Capital has steadily grown to become a leader in this field, buoyed by a loyal and continuously growing customer base. The company operates in Colombo and several major cities in Sri Lanka.

First Capital is an investment bank offering independent advice and transaction execution relating to capital raising and other strategic needs including mergers and acquisitions for investment in Sri Lanka. The Company’s industry-leading transactions are reflective of the ingenuity in enabling the most opportune financing processes for our clients. First Capital’s services for investment in Sri Lanka include a total service for public offers of corporate debt, acting in the capacity of managers/ financial advisors and placement agents, in addition to due diligence, pre-offer preparation, offer management, distribution strategy and after-market advisory services, initial public offerings, secondary offerings such as rights issues, corporate actions including mandatory and voluntary offers, private placements and at-market placements of listed securities.