The biggest question of how safe your money is when invested in a money market fund or to a bolder mention, unit trusts have been answered in our previous article.
There is a web meshed together so tightly as to ensure every investor is protected when it comes to investing in unit trusts. In a nutshell, a unit trust fund is like a big organized chama for investing purposes, that pools money together from many investors who share the same financial objective to be managed by a group of professional managers who invest the pooled money in a portfolio of securities such as shares, bonds, money market instruments or other authorized securities to achieve the objectives of the fund. In exchange for the money received from the investors, the fund issues units to investors who are known as unitholders. The fund earns income from the investment in the form of dividends, interest income and capital gains.
There are various parties that help weave the safety net while investing in unit trust funds and we have mentioned them on the go in the various former posts but it would be good to look at each of them and specific roles they play.
The Capital Markets Authority:
Unit trusts in Kenya are regulated by the Capital Markets Authority (CMA) Act Cap 485 A, and also the Capital Markets Collective Investment Schemes Regulations, 2001. Only unit trusts schemes that are approved by the Capital Markets Authority may be offered for sale to the Kenyan public. An approved fund can easily be identified by the cover of its prospectus which contains a statement that a copy of the prospectus has been lodged and approved by the Capital Markets Authority.
The Fund Manager:
A fund manager is responsible for implementing a fund’s investing strategy and managing its portfolio trading activities. Fund managers play an important role in providing investors with peace of mind, knowing their money is in the hands of an expert. It also means that as an investor, you have no control over the investment decisions of the fund manager. You should, therefore, do thorough due diligence on whether the fund manager has the resources, experience and skills to manage the fund and not be blinded by the past performance of the fund. Remember, past performance does not reflect future performance.
Read more on how to select a fund manager
Custodian:
The Custodian is responsible for holding and safeguarding the assets under management on behalf of the unitholders. The custodian is typically a bank or a financial institution approved by the Capital Markets Authority to carry out that role. Since a unit trust is essentially a large pool of funds from many different investors, it requires an additional entity to hold and safeguard the securities that are mutually owned by all the fund’s investors. The fund manager can only instruct the custodian to carry out investments in line with the investment policy.
The Trustee:
Trustees are assigned to ensure that the fund manager runs the fund following the fund’s investment goals and objectives. Their main responsibility is to act in the best interest of the investors while having an oversight function over the fund manager. According to CMA, a custodian is required to be a ban or a financial institution approved for that purpose. One of the duties of the trustee, as prescribed in the CMA Collective Investments Regulations 2001, is to ensure that the collective investment scheme is managed by the fund manager in accordance with the agreement of service with the fund manager, these Regulations, the incorporation documents, the information memorandum and the rules of the collective investment scheme. If the Trustee is not satisfied with any matter regarding the running of the fund as per the regulations, the Trustee is to report the matter to the Authority.
As much there are enough regulations to aid investor protection, it is ultimately investor’s responsibility to evaluate the viability of an investment solution based on their personal risk appetite and circumstances.
To learn more about high-returning investments, check out our other blogs.
This article was written by Rose Ellah Ngari, Chief Executive Officer at Vasili Africa. Get in touch with Rose for free investment advice via info@vasiliafrica.com or fill in your details below.
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