Make your savings grow

IN THESE difficult financial times, if you are one of the lucky ones who has extra cash left over at the end of the month that you are saving for your child's education, a holiday or to buy a home, unit trusts are worth considering as a sound and practical way to help you grow your savings.

IN THESE difficult financial times, if you are one of the lucky ones who has extra cash left over at the end of the month that you are saving for your child's education, a holiday or to buy a home, unit trusts are worth considering as a sound and practical way to help you grow your savings.

Unit trusts offer you, as an individual investor, convenient access to the financial markets and expert investment management. Simply put, your money is pooled with that of other investors and the fund manager uses his or her expertise to invest in the best underlying assets - whether equities, bonds, property or money markets.

This pool is then divided into equal units and investors then share in the fund's gains, losses, income and expenses. Units can be bought and sold freely.

There are many types of unit trusts designed to meet a range of investment needs - from conservative, income-generating funds to those that have aggressive long-term growth targets.

Money market unit trusts are the lowest-risk unit trusts available and aim to offer relatively high interest income. Essentially they are the same as investing in cash, but offer higher interest rates than a bank savings account. Fixed interest unit trusts invest in interest-bearing investments such as bonds, and are generally lower-risk than equities.

Largely affected by interest rate cycles, they will be actively managed according to the fund manager's view of the economic climate.

They are great investments if you want to draw a regular income, and some will even offer the potential for capital growth.

Property unit trusts give investors affordable access to the returns from commercial property and property developers. These funds offer growth potential, but can be as risky as equities since their value can move in line with both the equity market and property cycles in the wider economy.

Equity unit trusts invest in shares of companies listed on the stock market.

The companies selected by the fund manager can be from any industry or sector; this means that they offer the benefit of sector diversification. They are regarded as higher-risk funds as the equity market can be volatile. Although they can generate good returns, they can also perform negatively for long periods.

Specialist equity unit trusts are probably the riskiest funds on the market, as they invest only in one sector and offer very little diversification. The upside is that they have the potential to deliver high returns.

When structuring an investment portfolio, these are generally used as "satellite" funds to offer exposure to potential strong growth in the sector in question. Generally, it is not wise to make these a core component of your investments.

Investment solutions: asset allocation funds

Asset allocation funds (also called balanced funds) can include all the asset classes in one unit trust, and therefore offer true diversification. These funds are often called "solution funds" as they are structured according to a specific risk rating and are designed to meet the investment needs of investors that match that risk profile. Their fund managers usually have the freedom to move between asset classes to take advantage of market opportunities or to avoid losses.

For example, Macro Strategy Investments is the asset allocation specialist boutique at Old Mutual Investment Group SA.

They manage a range of funds designed to match a variety of risk requirements. For example, they manage a lower-risk fund called the Old Mutual Real Income Fund, which would have a high proportion of fixed interest and money market exposure, with a smaller equity portion to provide some growth potential. A more aggressive fund that seeks long-term growth like the Old Mutual Flexible Fund will invest more heavily in equity and property.

Unit trusts might not be for everyone, but they do offer a range of choices that, when selected with the help of a financial adviser, can provide most investors with a solution that will help you grow your savings with the appropriate amount of risk and return over time.

lThe writer is head of distribution of Old Mutual Investment Group SA

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