BOOKS

1 TO 6

A guide to
investing in
unit trusts The complete guide
A basic introduction to the world
of investing in unit trusts for the
South African investor
Contents
PART 1: An Intro to Unit Trusts
PART 2: Understanding Asset Classes
WATCH THE VIDEO SERIES
PART 3: Tax and Unit Trusts

A guide to investing in unit trusts PART 4: How do I choose the right unit trust for me?

BOOK 1 01 What is a unit trust? 04 BOOK 5 01 Is my money safe? 51

An introduction 02 What are the advantages of unit trusts? 05 After investing: 02 Are there any guarantees? 52
to unit trusts 03 What are the disadvantages of unit trusts? 07 what should you 03 What information will I receive about my investments? 53
04 Who should invest in unit trusts? 08 know? 04 Are there any lock-in periods? 54
05 Why invest in M&G Investments unit trusts? 09 05 What is a withdrawal? 54
06 Which M&G Investments unit trust(s) would be suitable for you to invest in? 11 06 Can I request that the proceeds of a withdrawal be paid to a third party? 55
07 M&G Investments Unit Trusts fund overview 14 07 Can I have a regular withdrawal from a unit trust fund? 55
08 How easy is it and how long does it take to access my money? 56
09 What if I miss a debit order payment? 56
BOOK 2 01 What are the different ways to invest in a unit trust? 17
10 What is a switch? 57
Ways to invest 02 What is FICA documentation? 20
11 What is a transfer of ownership? 57
in unit trusts 03 How much should you invest? 21
12 How do I invest more money? 58
04 Should you choose a lump sum investment or debit order? 22
13 Can I invest in unit trusts on behalf of my children? 58
14 Can I nominate a beneficiary? 59
BOOK 3 01 What are the various asset classes and how do they produce returns? 25 15 Can I cede my unit trust? 59
All about assets, 02 What is asset allocation, and why is diversification important? 30
risk and returns 03 What is risk? 31
04 What are the returns and risks associated with each asset class? 32 BOOK 6 01 How does a unit trust work? 62
How unit trusts 02 How do you make gains (or losses) in a unit trust? 63
05 Why is it important for unit trust returns to beat inflation? 33
work 03 How are unit trusts priced? 64
04 How does the performance of a unit trust work? 65
BOOK 4 01 What are the different costs and types of fees associated with investing in unit trusts? 36 05 Why does a unit trust have different unit classes, and what are they? 66
The costs of 02 How tax-efficient are unit trusts? 40 06 What is an income distribution, how does it work and how does it affect the daily 68
investing in unit 03 How Capital Gains Tax (CGT) affects you 41 price of a unit trust fund?
trusts: fees and 04 Are there CGT implications when I switch between funds? 42
taxes 05 How income tax and withholding taxes affect you 43
06 2020/2021 tax tables for investing 46 New to Investing? START HERE
07 An example of how capital gains tax (CGT) is calculated 47
Quicklinks: B1 | An introduction to unit trusts B2 | Ways to invest in unit trusts B3 | All about assets, risk and returns B4 | The costs of investing in unit trusts: fees and taxes B5 | After investing: what should you know? B6 | How unit trusts work

Book 1
An introduction to unit trusts
i This book covers:
01 What is a unit trust? 04
02 What are the advantages of unit trusts? 05
03 What are the disadvantages of unit trusts? 07
04 Who should invest in unit trusts? 08
05 Why invest in M&G Investments unit trusts? 09
06 Which M&G Investments unit trust(s) would be suitable for you to invest in? 11
07 M&G Investments Unit Trusts fund overview 14

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01
A unit trust (also called a fund) is a collection of
people’s savings that is invested in financial markets
and other assets. It is managed by professional
investment managers with the aim of growing its
What is a unit trust?
value over time.

Many investors pool their money by investing in the unit trust, and this pool is
divided into equal units, each with the same value. When you invest in a unit
trust, you are allocated units according to the amount of money you invest and
the price of the units on the day you buy them. Investors share in the risks and
benefits of the investment in proportion to their units (also called participatory
interests) in the fund.

The underlying assets that the fund invests in are typically equities, bonds,
listed property and cash. The composition of the assets depends on 1) the
fund’s risk profile, which indicates the level of risk associated with the fund,
and 2) the mandate, which prescribes what the fund may invest in.

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02
Management expertise Safeguards and transparency
Unit trusts are managed by investment Unit trusts and unit trust management
experts who will choose the underlying companies are strictly regulated, making
investments and manage them over time them transparent and safe for individuals
What are the advantages according to their investors’ goals (and the to use [see BOOK 5 - CHAPTER 1 for

of unit trusts? fund mandate) in terms of both risk and details regarding the regulatory agencies
return. Our investment team has over 400 and bodies involved]. Unit trust prices are
years of fund management experience. published daily, reflecting the previous
day’s closing price. Many unit trust
Affordability companies also have online systems
Unit trusts incur relatively low costs, that you can access to monitor your
compared to investing directly in shares, investments.
bonds or other assets. The pooling of
money provides the cost advantage of Diversification
buying in bulk. Unit trusts also allow By investing a small amount in a unit trust,
small amounts to be invested, some from depending on which unit trust funds you
as little as R500 a month, which makes choose (such as balanced funds or other
them a cost-effective way of accessing multi-asset funds) you can be exposed to
investments. a wide range of assets. This will help to
reduce risk. The benefits of diversification
are discussed in more detail in BOOK 3 -
CHAPTER 2.
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02
Quick and easy withdrawals Easy comparability
at no cost Unit trust funds from various management
Individuals have easy and quick access to companies are easily compared for
their funds should they need to withdraw performance by looking at funds in the
What are the advantages them. There are no extra costs involved, same ASISA category. The Association for
no lock-in periods and no waiting periods. Savings and Investment in South Africa
of unit trusts? M&G Investments generally takes 1-2 (ASISA) categorises unit trusts according
business days to process a withdrawal from to the different asset classes they invest in
the time the request is received. and their investment objectives.

Flexible contributions Tax effectiveness

Unit trusts are flexible, allowing investors to Asset managers can buy and sell assets in
regularly contribute relatively low amounts, a unit trust portfolio many times, but capital
or make various lump sum contributions at gains tax and other taxes are only payable
any time. You can also increase or decrease when the investor sells units. By contrast,
your debit order amounts as required, as individuals managing their own portfolio
long as the amount is above the unit trust will incur taxes every time they sell an asset
fund’s minimum debit order amount. at a profit.

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Types of assets Volatile short-term returns

Unit trusts generally invest only in listed Unit trusts should generally be seen

02
financial assets (traded on an exchange) as medium- to long-term investments.
and therefore do not provide opportunities Investors therefore should not expect to
for investment in tangible assets such as make significant returns in the short term
gold coins, diamonds, stamps, or unlisted (less than three years). The M&G Money
assets like privately held companies or Market Fund is the shortest-term unit trust
What are the advantages hedge funds. available from M&G Investments, for which

of unit trusts? Portfolio turnover

the recommended investment horizon is
up to one year. The Fund aims to provide
Unit trust returns are affected by the trading
returns above short-term bank deposit
costs associated with the portfolio turnover
rates.
of the fund. The percentage turnover rate is
a measure of the sales or purchase activity Risks of specialist unit trusts
of the portfolio manager. A unit trust fund that is specialised by being
heavily invested in one particular equity
No guarantee sector (such as an industrial fund or small
All unit trust investments run the risk that
caps fund) is likely to be more risky than
the markets may collapse and that investors
general equity funds and other unit trusts,
may lose money, since unit trusts are
as it is not diversified and may be negatively
neither insured nor guaranteed by either
affected by adverse changes in that sector.
the government or the financial institution.
As such, all unit trust investments involve a
potential risk.

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04
Unit trusts are suited to people who do not wish to
choose assets to invest in directly themselves, or
manage their own investments.
Who should invest This could be because of a lack of time, interest or in-depth knowledge. They
in unit trusts? also may not have the higher minimum contributions required to invest directly,
or want to pay the higher costs associated with constructing their own portfolio.
They prefer to entrust their savings to fund managers who are investment
experts.

By investing in a unit trust you can take advantage of expertly managed funds
that suit a variety of personal investment and savings needs. For example, our
investment team will actively allocate investments in our multi-asset unit trusts
across a wide range of asset classes with the aim of achieving certain return
targets with a specific level of risk. They shift weightings as markets move over
time to avoid losses and maximise gains wherever possible.

Unit trusts therefore make investing simpler for individuals – just choose the fund
or funds most appropriate for you.

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05
We offer our clients a Clients can benefit from a
consistently strong long-term successful and an experienced
track record in helping them investment team
meet their financial goals
Why invest in With over 400 years of collective
experience, our investment team is
M&G Investments We have built up an enviable track
dedicated to actively managing our
record for consistently strong investment
Unit Trusts? performance over time, to help our clients clients’ funds using the same prudent
meet their financial goals. Whether you value investing philosophy we’ve applied
want income, capital growth or both from successfully for the past two decades.
your investments, we are able to offer you The result: investment success for our
top-performing funds for these objectives. clients and ourselves. We believe that our
consistent philosophy and unemotional
application of our process will lead to
consistent investment performance over
time. Consistency is key to successful
investing − this is our investment edge.

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05
We put our clients first Clients benefit from the
Understanding and responding to our expertise and resources of M&G
clients’ needs is at the heart of our Investments' global affiliates
business – we’re committed to providing
Why invest in the highest standards of client service and
We’re part of the wider M&G plc group, one
of Europe’s largest active asset managers.
M&G Investments a comprehensive range of funds designed M&G plc has £300 billion in assets under
Unit Trusts? to meet their needs. We’ve invested management and over five million clients,
significantly in state-of-the-art systems and operates in 28 markets around the
and have an efficient and experienced in- world. Being part of such a successful
house team to ensure our clients have all global company gives us access to some
the information and transactional support of the best worldwide resources and
they need. Our clients can also rest easy investment expertise to help our clients
knowing that we adhere to global best achieve their investment objectives. The
practice when it comes to corporate group’s large scale and financial strength
governance. also offer significant benefits that many
other South African asset managers can’t
match. For more details on our investment
team and our global heritage, visit the
About us page on our website.

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06 YOU CAN CHOOSE TO INVEST THROUGH:

Your investment time horizon;
The level of risk you are able to tolerate; and
Which M&G Investments The type of returns or payments (income) you’d like to receive.
Unit Trust(s) would be
suitable for you to invest in? M&G Investments has a diverse range of funds to meet
all timeframes, risk profiles and return objectives,
including equity funds, balanced funds, income-
focused funds and global funds.

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1. Determine what your 2. Determine how much risk you

investment time horizon is are willing to take on

06 If you are saving towards a short-term goal

or have income requirements over the next
1-3 years, you cannot afford to take much
Generally, your investment time horizon and
investment goal help determine the amount
of risk to take. As noted, if you are saving

Which M&G Investments risk. In this case, a unit trust with a lower
degree of equity exposure and higher
towards a short-term goal or have income
requirements over the next 1-3 years, you
Unit Trust(s) would be holding of bonds and/or cash is more cannot afford to take as much risk. In this
suitable for you to invest in? appropriate for you in your mix of asset case, a unit trust with a lower degree of
classes. equity exposure and higher holding of
bonds and/or cash is more appropriate for
If, however, you are younger or are saving
you in your mix of asset classes.
for the longer term (5 years or more),
then you can afford to take on more risk If, however, you are younger or saving for
and therefore more risky unit trusts with the longer term (5 years or more), then
higher equity holdings. Risk can be reduced you can afford to take on more risk and
through diversification (by owning a range therefore more risky unit trusts with higher
of different assets associated with different equity holdings. This could include multi-
risk levels), which is discussed in BOOK 3 - asset class funds with strong diversification
CHAPTER 2. and varying levels of equity.

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3. Determine your investment Investors who are primarily looking for

goals: Income versus Capital capital gains want their investments to
Gains grow in value over the longer term, and are
less concerned about an immediate return

06
Generally, investors who are looking for
a regular income from their unit trust or income. Here you have a long-term
investment are either retired, or funding investment horizon of 5 years or longer,
a shorter-term expense like a child’s and can therefore tolerate more risk in your
education, and would want to minimise the choice of unit trust, since the chance of
Which M&G Investments risk of losing money. As a result, it would loss diminishes over time. An appropriate

Unit Trust(s) would be be appropriate to consider investing in

lower-risk unit trusts holding assets like
unit trust will therefore invest in more risky
assets like equities (100% in the case of an
suitable for you to invest in? bonds or cash, or a combination of these, equity unit trust). Our funds in this category
which will deliver regular interest payments include the M&G Equity Fund and the M&G
or distributions to meet your income Dividend Maximiser Fund.
requirements. An appropriate unit trust Medium-to-high-risk diversified funds offer
will aim to produce an income that is often investors a combination of income and
targeted at a certain rate above inflation capital gains by holding bonds, property
(consumer price inflation, or CPI) such and equity exposure. In our fund range,
as CPI+2%. They may also aim to protect these would include the M&G Balanced
capital. These unit trusts are generally Fund (up to 75% equities) and the M&G
termed “income funds” or “bond funds”. Inflation Plus Fund (up to 40% equities).
Our funds in this category include the M&G
Enhanced Income Fund, the M&G High
Yield Bond Fund and the M&G Income
Fund.

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M&G Investments Types of Investor Investment Risk

Unit Trusts Assets Held Time Horizon Goal Level

Money Market Fund Money market securities 1 - 12 months Income Low

Income Fund Short-term bonds 1 - 2 years Income Low

07
High Yield Bond Fund Bonds 1 - 3 years Income Low-Med

Equities (up to 10%), Listed Income/Capital

Enhanced Income Fund 3+ years Low-Med
Property, Bonds growth
Equities (up to 40%), LIsted Income/Capital
Inflation Plus Fund 3+ years Med-Low
Property, Bonds growth

M&G Investments Balanced Fund

Equities (up to 75%), Listed
Property, Bonds
5+ years Capital growth Med-High

Unit Trusts fund Enhanced SA Property Tracker Fund Listed Property (100%) 5+ years Capital growth Med-High

overview Dividend Maximiser Fund Equities (100%) 7+ years Capital growth High

Equity Fund Equities (100%) 7+ years Capital growth High

Income/Capital
Global Bond Feeder Fund Bonds 2+ years Low-Med
growth
Equities (up to 25%), LIsted Income/Capital
Global Inflation Plus Feeder Fund 3+ years Med-High
Property, Bonds growth
Equities (up to 25%), Listed Capital growth/
Global Balanced Feeder Fund 5+ years Med-High
Property, Bonds Income

Global Equity Feeder Fund Equity, Listed Property 7+ years Capital growth High

Bonds, Equity, Listed Income/Capital

7% Target Income Fund 7+ years Low-Med
Property growth
Bonds, Equity, Listed Income/Capital
5% Target Income Fund 7+ years Med
Property growth
Equity, Bonds, Listed Income/Capital
2.5% Target Income Fund 7+ years Med-High
Property growth

You can find a comprehensive explanation of each fund and who it is suitable for, plus fund fact
sheets with detailed fee and performance data, at mandg.co.za/our-funds.

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Book 1 ends here

BOOK 2 CONTINUES ON THE NEXT PAGE

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Book 2
Ways to invest in unit trusts
i This book covers:
01 What are the different ways to invest in a unit trust? 17
02 What is FICA documentation? 20
03 How much should you invest? 21
04 Should you choose a lump sum investment or debit order? 22

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01
There are two main ways to invest in a unit trust:
What are the different ways directly with the unit trust company or through a Linked
to invest in a unit trust? Investment Services Provider (LISP). In either instance,
this can be achieved through the help of an Independent
Financial Adviser (IFA) or directly. Each of these options
has its own advantages and disadvantages; the various
costs of each option are detailed in BOOK 4.

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Directly with the unit trust company

You can invest directly with a unit trust company, which would require you to

01
complete an application form, provide the necessary FICA documentation (read
about FICA overleaf) and make a fund selection. At M&G Investments we offer
investors the option of investing directly with us – instructions on how to invest are
available on our website.

What are the different ways However, regulations do not allow unit trust companies like M&G Investments (as

to invest in a unit trust? product providers) to provide investors with financial advice. This avoids any bias
or conflict of interest in recommending certain unit trusts. Only licensed Financial
Advisers (some tied to financial services companies and others Independent) may
give individuals advice in choosing their investments. M&G Investments works with
many Independent Financial Advisers, all of whom are licensed by the Financial
Sector Conduct Authority (FSCA). You can find a list of approved financial practices
and advisers for your area on the website of the Financial Planning Institute (FPI) of
Southern Africa.

While it may be cheaper to invest directly, since you avoid paying any adviser fees,
it is important to consider that this comes with additional risks: you may have made
inappropriate investment decisions for your financial circumstances, and you will
personally have to manage your investments over time. Should you want to switch to
a fund at another unit trust company, this can be cumbersome as you would have to
open up a new investment and provide your FICA documentation again.

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01
Through a Linked Investment Services Provider (LISP)
A LISP is an administration platform registered with the FSCA that packages, distributes
and administers a broad range of investment products. It acts like an intermediary
between investors and unit trust companies. Most LISPs require that you invest with
What are the different ways them through an IFA, as similarly to unit trust companies they are not licensed to give
to invest in a unit trust? financial advice. A LISP provides simple and cost-effective solutions to investors wanting
to invest in an assortment of investment products across different unit trust companies
in one place. LISPs offer consolidated reporting and the ability to easily switch between
investments with both a low cost and lower administrative burden. Should you want to
switch to a fund at another unit trust company that is on the LISP platform, you can do so
more easily and without the need to re-submit FICA documentation.

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02
The Financial Intelligence Centre Act (FICA) is a law
What is FICA passed in 2001 designed to combat money laundering,
documentation? which involves the abuse of financial systems to hide
the proceeds of crime.

Under the law, financial institutions are required to ensure they

have the correct details of all their clients. As a result, first-time
clients are required to submit documentation to verify certain
information, including proof of identity, physical address, banking
details and income tax number (if applicable).

You can find a list of required

i documents on the M&G Unit SEE THE LIST
Trust Application Form.

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03
Unit trust funds can be accessed for as little as
How much should R500 a month (via debit order) or R10 000 (as
you invest? a once-off lump sum). We recommend that you
consult a Financial Adviser to determine the most
appropriate amount for your own circumstances.

NEED HELP CHOOSING AN

AMOUNT TO INVEST?

i Try our goal calculator tool. It can help

you determine what monthly investment
GOAL CALCULATOR TOOL

contribution you need to achieve your

goal within a specified time period.

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YOU CAN CHOOSE TO INVEST THROUGH:

a once-off lump sum amount;

04 a lump sum amount PHASED IN over time; or

a recurring amount every month via a debit order.

Should you choose a lump sum Ideally, you want to invest when prices are low and sell when prices are high. However, in
reality it is impossible to predict the highs and lows of the market. Theoretically, lump sum
investment or debit order? investments can take advantage of times when the market is low. Phase-ins and debit
orders take advantage of rand-cost averaging when markets are volatile. By regularly
investing at different prices (both high and low) this strategy averages out the rand cost
of your investment over time. Debit orders also encourage regular savings habits and
remove the emotion from your investment decisions, as you are already committed to
investing regularly.

M&G Investments does not charge a fee if you miss a debit order payment (although your
bank may do so), and will only cancel a debit order after 3 consecutive missed payments.

REMEMBER
i One of the keys to investing is that it is not about timing
the market, but rather about time invested in the market.

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Book 2 ends here

BOOK 3 CONTINUES ON THE NEXT PAGE

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Book 3
All about assets, risk and returns
i This book covers:
01 What are the various asset classes and how do they produce returns? 25
02 What is asset allocation, and why is diversification important? 30
03 What is risk? 31
04 What are the returns and risks associated with each asset class? 32
05 Why is it important for unit trust returns to beat inflation? 33

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EQUITY
A stock or equity represents a share of ownership in

01
a company. Unit trust managers like M&G generally
invest only in companies listed on a stock market, so
the company is publicly owned and its share price is
published daily.
What are the various asset
classes and how do they The value of a company’s equity depends on many factors, and rises or falls over
produce returns? time as reflected in the share price, producing gains or losses for shareholders.
In addition, companies may pay dividends to shareholders, which represent a
portion of the annual profit of the company. Dividends are generally paid every six
months and can represent a steady income source for investors.

Equities have historically produced the highest returns for investors over time.
They are considered the most risky asset class because share prices are subject
to large movements in the stock market on a daily basis, so the investor can
experience large gains or losses. This is referred to as “volatility”, or the degree
of movement over time. The higher the volatility of a stock, the higher its risk.
Similarly, unit trusts that invest only in equities are higher risk than those that
invest in other assets. Volatility (and risk) decreases over longer investment
periods, however – the longer you stay invested in equities, the less risky they are,
since the chance of loss is reduced over time.

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LISTED PROPERTY
Unit trusts can invest in property companies listed

01
on a stock market, which gives investors exposure
to various types of assets including industrial, office,
commercial and residential properties.
What are the various asset Because it is an equity, a share in a listed property company offers returns through
classes and how do they the rise or fall in its share price over time, resulting in capital gains or losses.
produce returns? Additionally, it offers income in the form of regular shareholder distributions of
the rental income the companies earn (often linked to inflation). This provides a
key difference to other equities, where the dividends are typically not as reliable
over time. This difference generally makes listed property stocks less risky than
other equities, since their distributions are likely to be steadier. This gives listed
property the characteristics of both equities and bonds. Listed property values
generally behave differently to other equities in similar market conditions, making
it a good diversifier.

A Real Estate Investment Trust (REIT) is a type of listed property company that
is governed by strict regulations in terms of its structure and operations. South
Africa’s REIT regulations are very similar to those in other countries, helping
underpin investor confidence. For example, REITs are required to pay out at least
75% of their distributable profits to shareholders.

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BONDS AND CREDIT INSTRUMENTS

Bonds and other credit instruments are a form of company

01
or government loan. Since investors buy bonds that are
issued by the company (a corporate bond) or government
(a government bond), bondholders are effectively lending
money to that entity in return for regular interest payments
What are the various asset
and a final repayment after a certain period of time
classes and how do they (typically one year or more).
produce returns?
Investors earn interest as a regular income, and are repaid their initial investment
amount when the term of the bond ends. Generally, bonds are considered to be less
risky assets than equities. This is because companies are required to repay their
bondholders before making any payments to shareholders, should they experience
financial difficulties. Additionally, bond prices and yields historically have not
fluctuated as much as equities, making them less volatile investments.

INFLATION-LINKED BONDS
Inflation-linked bonds are distinguished by the fact that the interest rate
i they pay is linked to the prevailing inflation rate, and adjusts as that rate
moves up or down. These bonds therefore provide investors with some
degree of protection against rising inflation.

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01 CASH
Cash and equivalent assets comprise a range of
securities that basically take the form of short-
What are the various asset
term loans which earn regular interest, usually
classes and how do they
with a repayment period of less than one year.
produce returns?
These can comprise various types of money market instruments like certificates
of deposit, bankers’ assurances, promissory notes and company commercial
paper. Given their shorter maturity period than bonds, the interest rate paid –
and therefore the return to investors – is generally lower than bonds. However,
they are also lower risk than bonds because of their shorter repayment period.
These are generally considered to be the lowest risk type of investment made
by unit trusts other than actual cash (bank note) holdings. However, there is
still a chance that they can lose value in a financial crisis should banks or other
issuers not be able to fully repay their debts. Money market unit trusts fall
within this category.

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01 OFFSHORE ASSETS
Equities, property, bonds and cash not listed in
What are the various asset South Africa are considered to be offshore assets.

classes and how do they Because they are valued in foreign currency, they carry an additional currency
produce returns? risk which can impact the value of the investment negatively (should the rand
gain value or appreciate against the investment currency) or positively (should
the rand lose value or depreciate against the investment currency).

The South African government limits the extent to which retirement funds
can invest in offshore assets. Under Regulation 28 of the Pension Funds Act,
retirement funds are allowed to invest up to a maximum of 30% of the value
of their assets offshore (plus an additional 10% in Africa). Individuals are also
limited as to the total they are allowed to take overseas.

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Asset allocation is the process of deciding how much

money to invest in each asset class to make up your
overall portfolio.

02
It is important to diversify, or have different asset classes in your investment portfolio,
as this lowers the portfolio’s risk by taking advantage of the different strengths and
characteristics of each class.

Different assets produce different levels of income, and have different circumstances in
What is asset allocation, and which they may rise or fall in value. Importantly, they all have different levels of risk.

why is diversification important? For example, blending equities and bonds in a portfolio can help to reduce the overall
risk of your portfolio, since the values of these assets perform differently in different
conditions. When the economy is growing strongly, for instance, equities generally do
well but bonds perform less strongly (because interest rates would be rising).

Conversely, if the economy is in a slow growth period, equities do less well (since they are
dependent on company growth), while bonds would perform more strongly (as interest
rates would be falling). Since economic growth ebbs and flows in cycles over time (in an
unpredictable fashion), deciding on a broad allocation between various assets that you
stick to over time can help smooth your returns.

Combining different asset classes in different proportions will help you achieve your
investment objectives while taking less risk to do so. Multi-asset class funds like the M&G
Balanced Fund, the M&G Inflation Plus Fund or the M&G Enhanced Income Fund offer
strong diversification by blending several asset classes together in one fund with the aim
of meeting (and exceeding) a performance target while maintaining the appropriate level
of risk (refer to the M&G Unit Trusts table in BOOK 1 - CHAPTER 7).

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Risk (or volatility) is the possibility that an investment’s

actual return will be different than expected; it refers
to the extent to which the price of a unit trust fund
varies over time. This includes the chance of losing

03 some or all of the original investment.

In investing, risk is more specifically considered to be the amount of variation

(or difference) in the returns on an investment. The larger the volatility, the more
What is risk? the returns will vary from the long-term average return (i.e. the more volatile the
investment). Risk can be reduced by diversification, which is discussed on page 8. 30.

RISK VS RETURN
i Low levels of risk are associated with lower potential returns, whereas high levels
of risk are associated with higher potential returns. This is the risk-return tradeoff
shown in the graph below.
RISK/RETURN TRADEOFF

Low Risk
Low Return

RETURN
High Risk
High Potential Return

RISK

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Over the long term, equities and listed property have

historically proved to offer the highest long-term
returns out of the local asset classes, as shown in the

04
table (as of 30 September 2020). It is important to note
that the assets offering the highest potential returns
also come with the highest potential risk.

What are the returns and risks

associated with each asset class? 30-year 20-year 10-year 5-year
Asset Class Nominal Nominal Nominal Nominal Risk
Return Return Return Return
SA Equity (FTSE/JSE ALSI) 13.8% 13.3% 9.6% 4.8% High
SA Listed Property 12.7% 12.9% 1.8% -12.9% High
SA Bonds (All Bond Index) 12.2% 10.0% 7.6% 7.6% Medium
SA Cash (Stefi Index) 9.8% 7.4% 5.8% 6.4% Low

SOURCE: MORNINGSTAR, AS AT 30 SEPTEMBER 2020

The return earned on cash investments is directly related to the official level of
interest rates set by the SA Reserve Bank. When interest rates increase, cash
returns increase, and when interest rates fall, the return on your cash falls as well.

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05
Inflation is defined as rising prices over a time
period, and basically indicates how quickly the
cost of living is rising.
Why is it important for unit trust The value of your savings will be eroded by inflation over time, so your savings
returns to beat inflation? needs to grow at least at the same rate as inflation to maintain its value.
Ideally, it should grow at a rate above inflation. This is why many unit trust
funds specifically target a rate of growth above inflation. The higher the rate
above inflation targeted, the greater the risk that the fund must take on.

However, it is important to note that the lowest-risk unit trusts like money
market funds may not produce returns above inflation over certain periods
due to the short-term nature of their investments. This is also a significant risk
that investors should be aware of.

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Book 3 ends here

BOOK 4 CONTINUES ON THE NEXT PAGE

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Book 4
The costs of investing in unit trusts: fees and taxes
i This book covers:
01 What are the different costs and types of fees associated with investing in unit trusts? 36
02 How tax-efficient are unit trusts? 40
03 How Capital Gains Tax (CGT) affects you 41
04 Are there CGT implications when I switch between funds? 42
05 How income tax and withholding taxes affect you 43
06 2020/2021 tax tables for investing 46
07 An example of how capital gains tax (CGT) is calculated 47

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There are a number of different types of charges associated

with investing in unit trusts, whether you invest directly via a
unit trust company or indirectly through a Financial Adviser
or Linked Investment Services Provider (LISP). Legislation

01 requires disclosure to investors from all service providers on

their fees and charges, and these are usually disclosed on all
marketing material. All the service fees described here exclude
What are the different costs an additional 15% VAT charge.
and types of fees associated
with investing in unit trusts? TOTAL EXPENSE RATIO (TER)
The TER measures the direct total costs involved in managing a unit trust, and is a good
way to compare the cost of investing in different unit trusts. A transparent measure, it is
published regularly by all unit trust management companies for each of their unit trusts.
The TER includes costs like management fees, trustee fees, legal and audit fees and other
operating expenses. It is expressed as a percentage of the average net asset value of the
portfolio. Note that a higher TER does not necessarily imply a poor return, nor does a low
TER imply a good return. The current TER cannot be regarded as an indication of future
TERs. It is also important to note that the TER typically does not include fees charged by a
Financial Adviser or LISP platform.

Transaction Cost (TC) Total Investment

TC is a measure of the costs associated Charge (TIC)
with the buying and selling of underlying The TIC is the sum of the unit
assets within a unit trust. trust’s TER and TC.

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INITIAL FEES
Initial fees are sometimes levied on new

01 investments when purchasing units by a lump

sum, top-up or debit order.

Initial fees are deducted from the amount invested in the unit trust fund prior to
What are the different costs the investment being made. As a result, the actual amount invested will be lower
and types of fees associated than the initial amount.

with investing in unit trusts?

Financial Adviser
Unit Trust Company LISP
(IFA)

M&G Investments does Negotiable, up to a Most LISPs do not charge

not charge initial fees, nor maximum of 3%. Some any initial fees. Otherwise
do most other companies. IFAs prefer to discount these fees are negotiable,
Otherwise these fees an initial fee in favour of a up to a maximum of 3%.
are negotiable, up to a higher ongoing fee.*
maximum of 3%.

*At M&G Investments, we recommend that if the ongoing adviser fee is more than
0.5% (excluding VAT), the initial adviser fee should not exceed 1.5% (excluding VAT).

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ANNUAL FEES
Charged by the unit trust Charged by the LISP platform
company

01
Different platforms use different fee
This is an ongoing annual management structures. Platform fees are levied
fee that is levied by the unit trust by the LISPs to pay for administration.
company for administering the fund A part of the annual management

What are the different costs and managing the investments. fee charged by unit trust companies
may also be passed on to the LISP to
and types of fees associated remunerate the LISP for administering
Charged by the IFA
with investing in unit trusts? the investment, as well as for
Usually these fees are taken by the marketing the unit trust company’s
sale of the investor’s units in a fund. funds. These volume-based “rebates”
As investors contract directly with their are then passed on to investors in
IFAs, this fee is negotiated with the IFA order to reduce the platform fee.
directly and agreed to upfront. There is a current move in the industry
towards “clean priced” funds. A clean
pricing structure clearly segregates
the different fees applicable. With
clean pricing, a unit trust company’s
fees are paid to the unit trust
company, administration fees to the
administrator and advice fees to the
Financial Adviser.

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SWITCHING FEES PERFORMANCE FEES

SWITCHING FEES PERFORMANCE FEES
Switching fees may be charged For certain unit trusts, asset managers
Switching fees may be charged For certain unit trusts, asset managers
if an investor switches from one charge performance-based fees that
if an investor switches from one charge performance-based fees that
fund to another in a different unit are linked to the performance of the unit

01
fund to another in a different unit are linked to the performance of the unit

01
trust management company. M&G trust fund. A performance fee may be
trust management company. M&G trust fund. A performance fee may be
Investments does not charge any charged if a fund’s performance exceeds
Investments does not charge any charged if a fund’s performance exceeds
switching fees between its unit trusts, its benchmark. M&G Investments charges
switching fees between its unit trusts, its benchmark. M&G Investments charges
but some management companies performance fees for the M&G Dividend
What are the different costs but some management companies performance fees for the M&G Dividend
What are the different costs and investment platforms charge a Maximiser and M&G Equity Funds.
and types of fees associated and investment platforms charge a
fixed fee for each switch. Most do
Maximiser and M&G Equity Funds.
and types of fees associated fixed fee for each switch. Most do
with investing in unit trusts? not charge for switching between
with investing in unit trusts? not charge for switching between
funds within the same management
VIEW PERFORMANCE FESS
VIEW PERFORMANCE FESS
funds within the same management
company.
company.

EXIT FEES
EXIT FEES
This is a fee you may pay if you sell an
This is a fee you may pay if you sell an
investment within a certain period (i.e.
investment within a certain period (i.e.
within the first year), and is based on
within the first year), and is based on
the original capital invested as well as
the original capital invested as well as
growth of the fund. M&G Investments
growth of the fund. M&G Investments
does not charge exit fees for its unit
does not charge exit fees for its unit
trusts. However, some management
trusts. However, some management
companies may do so.
companies may do so.

CONTENTS B4 | 39
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02
Unit trusts are highly tax-
effective investments

It is prudent to consider tax planning as part of a holistic approach to your

How tax-effective financial planning and future. You should consult with your Financial or Tax
are unit trusts? Adviser to get advice that is appropriate to your specific circumstances
and find out how tax may influence your choices.

WANT EVEN MORE TAX-EFFICIENCY?

Consider investing tax-free with M&G Investments. Visit our
website to see our range of tax-free unit trust funds. While you’re

i there, why not use our tax-free investment calculator to work out
how much you could be saving by using this investment vehicle.

INVEST TAX-FREE TAX-FREE CALCULATOR

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Capital gains are triggered when you sell units from a

03
unit trust, if the value of those units has increased since
the date you invested.

Unit trusts calculate CGT based on the Weighted Average Base Cost method.
How Capital Gains Tax The difference in the base cost and the amount when you withdraw your money

(CGT) affects you or disinvest is known as a capital gain (or a capital loss if the value of the units
has declined). Capital gains are taxable in your hands in the tax year in which
you sell the units. Individual taxpayers enjoy an annual exclusion on any capital
gain (the current annual exclusions can be found in the latest SARS tax tables
on page 46)
13). You will be provided with an IT3(c) tax certificate at the end of each
tax year if you have made a capital gain or loss on your investment.

WHAT IS CGT?
A capital gains tax is a tax on the profit realized on

i
the sale of a non-inventory asset. The most common
capital gains are realized from the sale of stocks, bonds,
precious metals, real estate, and property.

SOURCE: SARS

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04
Yes, there are CGT implications when you switch
Are there CGT implications between funds, as you will be selling units in
when I switch between funds? one fund and purchasing units in another fund.
Switching between funds too often can erode
returns, and so should be avoided.

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05
You are taxed on the income distributions that
you earn within your investment. If you choose to
reinvest the regular distributions from the unit trust,
it is important to note that the income still accrues
How income tax and
to you for tax purposes. Your unit trust management
withholding taxes affect you company will provide you with an IT3(b) tax
certificate at the end of each tax year detailing all
the local and foreign interest, dividends and REIT
income you have received.

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Local interest income is subject to Foreign interest income received

income tax, and is taxed by the Receiver of by individuals from foreign companies is
Revenue at the investor’s marginal rate of subject to income tax; this income is taxed
tax. Individual taxpayers enjoy an annual by the Receiver of Revenue at the investor’s

05
exemption on all South African interest marginal rate of tax.
income they earn from, for example, unit
trusts and bank accounts. The current annual Foreign dividend income received
exemptions can be found in the latest SARS by individuals from foreign companies is
How income tax and 46.
tax table on page 13. subject to tax at a maximum effective rate
withholding taxes affect you that can be found in the latest SARS tax
REIT income is subject to income tax; this table on page 46.
13.
income is taxed by the Receiver of Revenue at
the investor’s marginal rate of tax.

Local dividend income is subject

to Dividend Withholding Tax (DWT).
This dividends tax is withheld from your
investment by the entity that is paying the
dividend and paid over to SARS on your
behalf. The current DWT rate of tax can be
13.
found in the latest SARS tax table on page 46.

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Foreign tax credits combat the Local interest withholding tax

double taxation on foreign taxes levied on is imposed on interest from a South
foreign income earned by South African African source payable to non-residents.

05
tax residents. South African tax residents
are taxed on their worldwide income,
which creates the potential for foreign
income to be taxed both in South Africa
How income tax and and in the country where it was earned.

withholding taxes affect you The credit is limited to the maximum of

the tax in South Africa.

ASSET CLASSES AND ASSOCIATED INCOME DISTRIBUTIONS*

Interest Dividend REIT

Asset Class
Income Income Income

Equity û ü û
Property ü û ü
Bonds ü û û
Cash ü û û
*Please note that in order to confirm the type of income distribution received from a particular unit trust
fund, you should consult with your Financial Adviser or the managing company of the unit trust fund, as
they can differ from the typical distributions above.

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The table below is based on the 2020/2021 South African

06 revenue service (SARS) Tax Tables.

2020/2021 tax Source of Income Tax Rate Annual Exemptions

tables for investing
Individuals and special trusts:
Capital Gains Individuals: 18%
R40 000 per annum
Taxed at the Under 65: R23 800 per annum
Local Interest Income individual’s marginal 65 and over: R34 500 per
tax rate annum
Taxed at the
REIT Income individual’s marginal N/A
tax rate
Local Dividend Withholding tax rate
N/A
Income of 20%
Foreign Interest Taxed at individual’s
N/A
Income marginal tax rate
Foreign Dividend Maximum effective rate
N/A
Income of 20%

SOURCE: SARS

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CGT was implemented in South Africa on 1 October 2001; prior

to this date capital gains were not taxable in South Africa.

07
A capital gain or loss is determined by deducting the original cost (base cost) from the
market value of the units at date of sale. The base cost for investments made before
1 October 2001 (valuation date) was calculated as the average repurchase price for
the last five trading days before the valuation date. The base costs as published by
An example of how capital the industry should be used, which are available on the ASISA website. For unit trusts
purchased on or after 1 October 2001, the actual cost incurred in purchasing the units
gains tax (CGT) is calculated should be used to calculate the base cost. Industry practice is to make use of the
Weighted Average Base Cost method.

The weighted average base cost method is simply the weighted average price paid
for the units. An average unit cost is calculated after each purchase of units by adding
the cost of the newly purchased units to the cost of the existing units and dividing
this figure by the new total number of units. When the units are sold the gain for that
transaction would be the difference between the weighted average base cost at that
time and the sale price multiplied by the number of units sold.

(cost of new and existing purchases)

i Weighted average base cost =
(new total number of units)

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EXAMPLE
This example is calculated in rand for ease of reference, the cost per unit is usually

07
shown in cents. Units in a unit trust are purchased on the dates indicated below:

Transaction Investment Cost per Number of Units

(Investment value
Date Value (ZAR) Unit (ZAR)
An example of how capital / cost per unit)

gains tax (CGT) is calculated 01/02/2020

01/03/2020
R200 000
R100 000
R11
R12
18 181.82
8 333.33
01/04/2020 R50 000 R13 3 846.15
01/05/2020 R150 000 R14 10 714.29
Total R500 000 41 075.59

On 1 June 2020, the unit price is R15 Based on the 2020/21 SARS Tax tables:

The investor repurchases R300 000 by selling R40 000 of this R56 600 is exempt from CGT
20 000 units (R300 000 / R15)
Leaving a taxable capital gain of R16 600
The weighted average unit cost is (R56 600 – R40 000)
R500 000 / 41075.59 = R12.17
Using the maximum effective tax rate for
The base cost of 20 000 units is individuals of 18%
R243 400 (20 000 * R12.17)
The total CGT payable is therefore R2 988
The capital gain is (R16 600 * 18%)
R300 000 – R243 400 = R56 600

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Book 4 ends here

BOOK 5 CONTINUES ON THE NEXT PAGE

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Book 5
The costs of investing in unit trusts: fees and taxes
i This book covers:
01 Is my money safe? 51 09 What if I miss a debit order payment? 56
02 Are there any guarantees? 52 10 What is a switch? 57
03 What information will I receive about my investments? 53 11 What is a transfer of ownership? 57
04 Are there any lock-in periods? 54 12 How do I invest more money? 58
05 What is a withdrawal? 54 13 Can I invest in unit trusts on behalf of my children? 58
06 Can I request that the proceeds of a withdrawal be paid to a third party? 55 14 Can I nominate a beneficiary? 59
07 Can I have a regular withdrawal from a unit trust fund? 55 15 Can I cede my unit trust? 59
08 How easy is it and how long does it take to access my money? 56

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01
Yes, unit trusts are governed by the
Collective Investment Schemes Control Act,
No. 45 of 2002 (CISCA) and regulated by the
Financial Sector Conduct Authority (FSCA).
Is my money safe?
Independent trustees oversee unit trust schemes and the assets of
the unit trust funds are held in safe custody at a financial institution.
The assets of a unit trust are managed by a registered CIS Manager
who needs to be approved by and registered with the FSCA, as well as
comply with CISCA. Unit trusts are also required to act in accordance with
certain codes of conduct and guidelines laid out by the Association for
Savings and Investment South Africa (ASISA). (Refer to the Glossary for
explanations of ASISA, the FSCA and CISCA.)

This does not mean that your assets are safe in terms of investment
losses. Investment losses depend on how the unit trust funds are invested
– in theory, any unit trust can incur an investment loss, and unit trusts are
not guaranteed against losses.

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02
No, there are no performance guarantees
offered by a unit trust investment or the
unit trust management company.
Are there any guarantees? Investors in the unit trust take on the market risk associated with the
investment objective and mandate of the fund. Past performance is not
necessarily a good indicator of future performance.

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03
As a new investor, you will receive a welcome letter from
M&G Investments showing your initial transaction.

Thereafter, for unit trust funds that make distributions monthly (like the M&G
What information Income Fund) you will receive a monthly statement showing the latest value
will I receive about of your investment(s) and any transactions over the period. For those funds
my investments? that make distributions quarterly or bi-annually, you will receive quarterly
statements. You will also receive transaction statements after a transaction
on your account has been processed. See BOOK 6 - CHAPTER 3 on how
units are priced for more details.

Most unit trust management companies, including M&G Investments, also

provide daily price updates for all of their unit trusts (excluding money market
funds) on their websites. You can sign up to view your account information
and register to transact on your unit trust account should you wish to add
more funds, withdraw funds, etc. The M&G Investments website provides all
the forms necessary for any type of transaction.

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04 05
Are there any What is a
lock-in periods? withdrawal?

No, unit trusts do not lock you into Also known as a repurchase or
minimum periods of investment. You can redemption, this is when you sell some or
withdraw your investment from your unit all of the units that you own in a unit trust
trust fund at any time. fund. The proceeds are then paid into
your bank account.

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06 07
Can I request that the Can I have a regular
proceeds of a withdrawal withdrawal from a
be paid to a third party? unit trust fund?

No, third-party payments Yes, some investors invest a lump sum

are not allowed for security amount and use their unit trust to pay
reasons. them a regular income.
The proceeds of a withdrawal can only You can set up a regular withdrawal on your unit trust fund
be paid into the bank account that the for various amounts over various periods. It is important
unit trust company has on record for you. to note that if your real return (after taking inflation into
Please see BOOK 2 - CHAPTER 2 for an account) on your investment is not higher than your regular
explanation of FICA. withdrawal, you may erode your capital. Regular withdrawals
should be done in consultation with your Financial Adviser.

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08 09
How easy is it and What if I miss
how long does it take a debit order
to access my money? payment?

If a unit trust company receives your withdrawal M&G Investments does not charge any
instruction before their applicable cut-off times and fees should you miss a payment, but
provided all the relevant documentation is in order, your bank may do so. M&G Investments
the transaction will be processed on the same day. will cancel a debit order after three
If the instruction is received by the company after their cut-
consecutive payments have been missed.
off times, the transaction will be processed the following
day. Once the transaction has been processed, the
proceeds should reflect in your bank account within two
working days.

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10 11
What is a switch? What is a transfer
of ownership?
This is a withdrawal from one unit trust
fund and using the proceeds to buy This is when an investor wants to transfer full
units in another unit trust fund. These ownership of their unit trust investment to
are allowable at any time, and M&G another person or entity.
Investments does not charge for switching
There is no withdrawal of units from the market – the units are
between its own unit trusts.
simply “booked over” into the other person’s name. There are tax
benefits of transferring units between spouses, as this is seen as a
“rollover event” and no capital gains tax (CGT) is applicable in this
case. However, with transfers that are not between spouses, the
person or entity transferring the units may incur CGT, depending on
whether a profit or loss was made on the investment. See BOOK 4 -
CHAPTERS 3 TO 7 for more about CGT.

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12 13
How do I invest Can I invest in unit trusts
more money? on behalf of my children?

You can invest more money by completing the Yes, as the parent or legal guardian, you are
unit trust company’s additional investment form able to open a unit trust investment in the
or by transacting online. minor’s name. You will be required to sign all
documentation until the minor reaches the
You can find M&G Investments’ form here. You can make age of 18.
payment into the unit trust fund via an Electronic Funds Transfer
(EFT) or, alternatively, the unit trust company can electronically
collect the funds from your bank account.

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14 15
Can I nominate Can I cede
a beneficiary? my unit trust?

No, unit trusts are classified as an Yes, your assets within a unit trust fund
asset and therefore will form part of can be used as collateral and a cession
your estate and be executed as per may be applied to the investment.
your Last Will and Testament.

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Book 5 ends here

BOOK 6 CONTINUES ON THE NEXT PAGE

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Book 6
How unit trusts work
i This book covers:
01 How does a unit trust work? 62
02 How do you make gains (or losses) in a unit trust? 63
03 How are unit trusts priced? 64
04 How does the performance of a unit trust work? 65
05 Why does a unit trust have different unit classes, and what are they? 66
06 What is an income distribution, how does it work and how does it affect the daily 68
price of a unit trust fund?

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01
Unit trust managers gather people’s
savings and use the money to buy
(or invest in) a range of assets.
How does a unit The managers’ goal is to use their expertise to increase
trust work? the total value of the unit trust (usually aiming for a
certain performance target) by choosing the highest-
returning assets in line with the most appropriate level of
risk for that fund. Individuals should choose a unit trust
that best meets their own risk and return requirements.

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02
Asset values for equities, bonds, property and cash held
by unit trusts rise and fall over time, depending on daily
stock and bond market movements, as well as interest
rate changes.
How do you make gains
(or losses) in a unit trust? These movements in turn impact the value of unit trusts invested in these
assets. Unit trust investors make gains (or losses) when the total value of the
underlying assets rises (or falls) – this will be the sum of gains and losses
across many investments over a period.

These gains or losses are called investment returns, and are made up of
three components: asset price increases (capital gains); dividends paid
by companies to shareholders; and interest paid by bonds or cash. Fund
performance is determined by these three elements, each of which are taxed
Refer to page
differently BOOK
(see64 4 onfor
overleaf an explanation
taxes). of how
Refer to page unit trusts
7 overleaf areexplanation
for an priced, and
page 65unit
of how for trusts
an explanation ofand
are priced, howpage
unit trust
9 for performance is of
an explanation calculated.
how unit trust
performance is calculated.

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03
The Net Asset Value (NAV) of the fund is the market
value of investments, plus cash held, dividends
accrued and income accrued less the liabilities due
by the fund.
How are unit
trusts priced? The value of each unit within a unit trust can be calculated by
dividing the value of the fund by the number of units that have been
issued. Price is determined by the NAV of the portfolio’s underlying
investments. Units are priced daily because the value of the underlying
investments changes every day in line with market movements.

Unit trusts are priced on a forward pricing basis, which is used

throughout the unit trust industry. With forward pricing, the price is
established each evening, using closing prices of investments for the
day. This means that when you buy or sell units you do so at the closing
price of that day. The NAV prices for unit trust funds are published
daily in various daily newspapers and online sources.

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When measuring performance of unit

trust funds we look at the total return of
the fund, which can be measured over

04
various periods.

The total return of a fund is made up of capital gains (or losses)

and income distributions in the form of interest, dividends and REIT
How does the performance income, that have been earned over a given period of time.

of a unit trust work?

i Total Return = Capital Gain/Loss + Income Distribution

The total return of a unit trust fund is directly related to the daily price of the
fund. As the price rises, the fund’s return increases, and as the price falls so
does the fund’s return. It is important to know that when prices decrease,
this loss of return is only a “paper loss”. This means that the loss is only seen
on paper as you would only be locked into this loss when you sell your units.
The reason for this is that investing in unit trusts is a medium- to long-term
strategy and the fund’s prices continually rise and fall over the life of an
investment. Generally, the longer you can stay invested, the more likely you are
to enjoy a good investment return.

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A unit trust fund can earn income from the underlying assets

05 that it holds. This income is referred to as “distributable

income” (since it is distributed to unitholders). It consists of
interest and/or REIT income and/or dividends, depending on
What is an income the underlying holdings.
distribution, how does it work
and how does it affect the Unit trust expenses are deducted from income, and the net income forms part of

daily price of a unit trust fund? the fund’s daily unit price. The daily unit price consists of an income and a capital
portion. The income portion is the fund’s income less the fund’s expenses divided
by the number of units in issue and the capital portion is the value of the underlying
holdings divided by the number of units in issue. Income declarations are made by
unit trust funds (this could be monthly, quarterly, bi-annually or annually), and this is
when the income at the declaration date is paid out to the investors.

When investors buy units at any point in time, they are purchasing the income that
has been accrued in the daily price up to that point (as discussed above). They are
effectively buying the income that the fund will distribute at a future point in time.

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Once the fund has declared income the unit price will drop by the amount of income
declared. This will generally be the income portion of the price at the declaration date.
The income can either be paid out to the investor, or reinvested back into the fund. In

05
the latter case, the client will now have a greater number of units, although the unit price
will be lower as the price has dropped by the income declared as discussed above. It
is important to note that reinvesting these distributions is highly beneficial due to the
power of compound interest (i.e. growth on growth) over time. You will be taxed on these

What is an income distributions whether you have them paid out or reinvested. This is discussed in more
detail in BOOK 4.
distribution, how does it work
and how does it affect the Investors also need to understand that market movements will also affect the unit price,

daily price of a unit trust fund? and a drop in the daily price after an income distribution will not necessarily be equal to
the income distribution. The market value of the underlying assets could have dropped,
resulting in a greater drop in the daily price, or vice versa, where the underlying assets
have risen in value and the drop is therefore less than the income distribution.

When an investor buys units in a unit trust fund, the cost includes the income accrued up
to that point in time as discussed above. When the investor sells units they are selling the
income accrued up to that point in time. The income sold would form part of the proceeds
for Capital Gains Tax (CGT) purposes, and the original cost would include the income
bought. Therefore, income is only included in an investor’s taxable income if it is declared
while the investor holds the units. If they sell units before a declaration, the profit or loss
would be taken into account for CGT purposes.

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A unit trust fund can have different classes of units. This

allows a unit trust company to charge different types
of investors (companies, individuals, etc.) different fees

06
within one fund. Each class of units is open to different
types of investors, has different minimum investment
amounts and also has different fee structures.

Why does a unit trust

CLASSES OPEN TO INDIVIDUAL INVESTORS
have different unit classes,
and what are they? A Class T Class
This is the default class for funds This is the “tax-free” class introduced by
launched after June 1998. The M&G Investments from 1 March 2015 to
minimum investment amounts are offer investors a separate class of unit
reasonably low to attract individual trusts that is exempt from taxes on capital
investors. gains, dividends and interest. It also has
different fees compared to the A Class.

CLASSES OPEN TO INSTITUTIONAL INVESTORS

B & D Classes
This class is open to institutions like
pension funds with large amounts to invest.

CONTENTS B6 | 68
9
 Glossary of unit trust
terminology VIEW ONLINE

Term Definition Term Definition

ASISA - Association of The industry body which assists the FSCA with the regulation of the financial services industry. Its Multi-asset fund A unit trust that invests in more than one type of asset. For example, balanced funds can invest
Savings and Investment members include most South African financial services providers, including asset managers, insurers across most asset classes.
South Africa and banks. NAV price of a fund The Net Asset Value (NAV) of a fund is the market value of investments, plus cash held, dividends
Beneficiary A person who derives advantage from something, especially a trust, will, or life insurance policy. accrued and interest accrued, less the liabilities due by the fund. The value of each unit can be
Capital gain/loss The increase (or decrease) in the price of an asset such as equity, property or other investments that calculated by dividing the value of the fund by the number of units that have been issued.
leads to a profit (or loss) when it is sold. Participatory interest Units owned by an individual in a unit trust fund.
Capital Gains Tax (CGT) A tax levied on profit from the sale of an asset such as equity, property or other investments when it Principal The amount originally invested or deposited in an account or fund.
is sold. Rand-cost averaging The technique of buying a fixed rand amount of a particular investment on a regular schedule,
Cession/To cede Legally, the formal giving up of rights. Also, to give away ownership of something. regardless of the share price. More shares are purchased when prices are low, and fewer shares are
Collective Investment CISCA regulates the administration, management and sale of collective investments. bought when prices are high.
Schemes Control Act, No. 45 REIT/REIT income A Real Estate Investment Trust (REIT) is a type of listed property company that is governed by strict
of 2002 (CISCA) regulations in terms of its structure and operations. Distributions paid by REITs to shareholders are
Compound interest Interest added to the principal of a deposit or loan so that the added interest also earns interest from taxed as income, at the individual’s marginal income tax rate.
then on. This addition of interest to the principal is called compounding. Return/Total return The percentage gain or loss in the value of a unit trust over a period of time. The total return includes
Dividend income Income from dividends paid to shareholders in a company. both income/distributions paid to the investor and the change in asset value (capital gain).

Financial Services Conduct A unique and an independent institution established by statute (Financial Services Board Act, 97 of Standard deviation Also known as risk/volatility. This measures the amount of variation or difference in the monthly
Authority (FSCA) 1990), to oversee the South African non-banking financial services industry in the public interest. The returns on an investment. The larger the annualised monthly volatility, the more the monthly returns
FSCA is responsible for ensuring that the regulated entities comply with the relevant legislation, as are likely to vary from the average monthly return (i.e. the more volatile the investment).
well as capital adequacy requirements to promote financial soundness of these entities and thereby Total Expense Ratio (TER) The TER measures the direct costs involved in managing a unit trust. The TER shows the charges,
protecting the investing community. levies and fees relating to the management of the portfolio and is expressed as a percentage of
Fund of Funds A fund that is comprised of holdings in other funds (and therefore not invested directly in the the average net asset value of the portfolio, calculated for the year to the end of the most recent
underlying assets). completed quarter.

Institutional investors Corporate investors such as pension funds and medical aids. Weighted average base cost This method is used to calculate the base cost for CGT purposes. It is the weighted average price
method paid for the units.
Interest income Income received from investments such as bonds and money market instruments (cash) that pay
interest. Withdrawal To take money from an account or investment; also known as redemption/repurchase.

Linked Investment Services A platform run by a financial services company offering a variety of investment products, including Yield The income return on an investment; specifically, the interest or dividends received from an asset. This
Provider (LISP) unit trusts, from different asset managers. is usually expressed annually as a percentage based on the investment's cost, its current market value
or its face value.

CONTENTS 69
14
 A guide to investing
in unit trusts

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CONTENTS