Eunice is in a chama called the Rich Today Group. There are nine other members in this group and they each contribute Sh10,000 on a monthly basis. Together, they raise Sh100,000 each month, which they invest in the stock market.

Before Eunice joined this chama, she had considered investing in the stock market by herself, but her job at the pharmacy, where she works long hours, left her little time to do the necessary research on what stock to buy and to keep track of movements on the stock market. Also, she figured that Sh100,000 can be invested in more companies than just her Sh10,000.

Another reason she joined Rich Today is because each member had an area of expertise that would contribute to the group’s knowledge of their investments; someone within the group had good analytical skills, while someone else had experience with the stock market and was going to assist them with the day-to-day decision-making.

Benefits of pooling

We have often heard the term “unit trust” being floated around. Many times, we do not know what it actually means other than that it is some sort of investment. You may have seen the financial page in the newspaper with the column title “unit trusts”, but backed off when you saw very many percentages and numbers that followed underneath the title.

Well, it is not that complicated. A unit trust is basically an investment chama — except that it is just a little more sophisticated. The concept is exactly the same as the Rich Today Group.

Members of a unit trust pool their financial resources to pursue a common investment. Just like Eunice, people who invest in a unit trust do so because they think they will benefit more if they combine their resources with other people, or because they feel they do not have the time or know-how to make their own investments.

Eunice knew, when she joined the Rich Today Group, that she would not be in charge of the decision-making. The same applies in a unit trust. Investment managers are appointed and paid fees to make the everyday decisions that ensure that the investment grows.

Investors do not have to contribute the same level of funds in one unit trust. Someone may have Sh100,000, another Sh10,000, and another Sh1 million. All the money can be invested in the same fund.

However, ownership units (similar to shares) are issued to the investors depending on the size of their investment. So the person who invested Sh10,000 will get fewer units than the person who invested Sh1 million.

So, are all unit trusts the same? They are, in terms of how they operate, but they are different when it comes to where they invest. The Rich Today Group, for example, is an example of an equity fund. Equity funds are collected with the primary purpose of investing in the stock market.

If you choose to invest in this fund, you have accepted the risks and returns that come with the nature of investing in the stock market.

Popular unit trusts

Other popular unit trusts are fixed income funds, which invest primarily in Treasury and corporate bonds (you learnt about bonds last week). Money market funds are placed in short-term safe investments like bank deposit accounts and Treasury bills.

Balanced funds provide access to a combination of various investments avenues. Your objective for your money will drive which unit trust you want to invest in - or even help you decide whether unit trusts are really the investment organ for you.

The same benefit of pooling applies. If I go to the bank with Sh100,000 to put in a deposit account, I will get minimal interest because the amount is small. But when the investment manager goes with Sh10 million, the rates he gets are much more favourable.

The author runs a programme on personal financial management. Find her at [email protected]