A Basic Guide to Mutual Fund Investing

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2 Trinidad and Tobago Unit Trust Corporation presents A Basic Guide to Mutual Fund Investing If you re new to mutual funds, this guide will give you some of the basic information you need to start investing. CONTENTS Welcome to the World of Mutual Funds What is a Mutual Fund? Why Invest in Mutual Funds? How mutual Funds work Types of Mutual Funds Things to consider before you invest Matching Funds to your Goals Types of Funds offered by UTC getting your investment programme started

3 Most people are looking for ways to make their money grow in order to keep up with the cost of living. And many of them, like you, are taking a closer look at Unit Trust Corporation s family of funds. UTC s funds, like all mutual funds, provide an easy way to participate in the financial markets. You don t have to be an investment expert or spend a lot of time managing your portfolio to invest in mutual funds. And you don t need a lot of money to get started. What you do need is a basic understanding of what mutual funds are, how they work and which type of fund may be right for you. You also need to understand how your financial goals relate to some basic investment concepts like risk, reward and diversification. With a firm grasp of these basics, you'll be ready to join the growing ranks of mutual fund investors who continue to reap rich rewards. You probably do not know that mutual funds are one of the fastest-growing investment opportunities worldwide. The reason for their popularity is simple: mutual funds make investing easy. When you invest in mutual funds, you enjoy an exceptionally wide range of choices to reach your financial goals. Plus, you get the added benefits of professional management, convenience, opportunity for greater returns with reduced risks, and value. Any way you add it up, that s a powerful combination. At Unit Trust, we ve built our business by helping investors make the right choices. This guide will give you the information and confidence you need to start putting mutual funds to work for your future. Welcome to the World of Mutual Funds 1

4 What is a Mutual Fund Why invest in Mutual Funds? Think of mutual funds as groups of people who share common or mutual investment goals. Instead of investing on their own, they band together, pool their resources, and let professional managers invest for them. Mutual funds provide an ideal vehicle for new investors. They give even modest savers with just $ the chance to have top notch expert management of their money and the opportunity to invest in a broad range of companies. They are flexible and easy to buy. Mutual funds offer you a combination of advantages that s hard to beat. Higher Potential Returns Investing in a mutual fund gives you the opportunity to earn higher returns than you may currently be getting at your bank. It s important to understand that, unlike conventional bank accounts, special accounts and fixed deposits, mutual funds derive their advantage through the pooling of investors funds to make investments. Professional Management If you re a newcomer to the world of investments, you may not have the time, skill or knowledge to manage your investments yourself. UTC s funds are managed by full-time professionals who have access to in-depth market research. They follow market trends, identify attractive opportunities and manage each fund according to its investment objectives and policies. Diversification To put it simply, diversification means not putting all your eggs in one basket. Mutual funds invest in portfolios of different securities. For example, a fund s portfolio might include stocks in commercial banks, manufacturers and insurance companies, among others. 2

5 Why invest in Mutual Funds? (continued) If the manufacturing industry is down, the banking and insurance industries may be doing well, so the fund s overall performance may not be adversely affected by a downturn in one stock or industry. Of course, there s no assurance that a fund will do well, regardless of its portfolio composition; but by spreading your risk, you increase the prospects of a good overall return. Low Minimums You don t always need a lot of money to start investing in mutual funds. So, for a fraction of the cost you can own a portion of a large portfolio of securities. Plus, you get the same investment management that pension funds and wealthy individuals enjoy. Access to Your Money Generally, mutual funds don t tie up your money for a fixed period of time - how long you remain invested is up to you. Fund units can be bought and sold on any business day at their current unit price. Of course, in funds such as a Growth and Income Fund, share prices go up and down, so you may receive more or less than your original investment when you sell your shares. 3

6 How Mutual Funds work Mutual funds may seem complicated, but understanding the basics of how they work is easy. You invest in a mutual fund by buying units. The number of units you buy is determined by the fund s unit price or net asset value (NAV) and the amount you have to invest. For example, if a fund s unit price is $10.00 and you have $1, to invest, you ll be able to buy 100 units assuming there s no sales charge or transaction fee. By owning units of a fund, you become a unitholder. A mutual fund pools money from many individual unitholders like yourself. The fund s manager invests this money in a portfolio of stocks, bonds, T-bills or other securities, depending on the fund s objectives. As a mutual fund unitholder, you can potentially make money in two ways: - Dividends, which are paid from earnings generated by the fund s investments. These earnings may include dividends paid by issuers of securities or in the form of interest generated by investments. - Capital gains growth, is earnings generated when an investment that has increased in value is sold. There are two basic types of capital gains when investing in mutual funds: (a) When a mutual fund sells an investment in its portfolio for a higher price than was paid for it. This is passed on to the unitholder as an annual capital distribution; (b) when the price at which you can sell your units exceeds the purchase price. 4

7 Types of Mutual Funds Here are some of the funds you need to know about: Money Market Fund This fund offers investors high liquidity with low risk, and it provides a safeguard on your capital while generating a high level of income. Investments in these funds include short-term securities, namely: Treasury Bills, Fixed Deposits, Bonds, Commercial Paper, etc. Money Market Funds are designed to help safeguard money to which you want easy access. Some people use money market funds as a second chequing account or as a parking facility for their money between investments. Money Market Funds generally pay higher interest rates than bank accounts or Fixed Deposits. They also seek to provide a stream of income by investing in bonds and other securities which can be a good choice if you need a regular source of extra income. 5

8 Types of Mutual Funds Balanced Funds These funds are generally referred to as Income and Growth Funds. They seek to earn both capital gains and current income. These funds invest in high-grade common stocks, bonds and other fixed income securities. Because these funds seek to grow your money over time, they invest a majority of the funds in stocks. Historically, common stocks on average have outperformed most other kinds of investments when held over the long term. In addition, average stock returns have kept well ahead of rising prices, as measured by the Consumer Price Index. Stock prices will fluctuate with changes in market conditions, and as a result, stocks may also help protect the purchasing power of your money against the ravages of inflation. 6

9 What is a Stock? Stock represents an ownership stake in a company. Typically, the price of the stock will reflect the company s fortunes; rising if its business is successful, and declining if it is not. Some stocks also share the company s profits with stockholders in the form of dividends. Types of Mutual Funds Defined Growth Funds The primary objective of Growth Funds is to maximise capital gains with little emphasis on a regular flow of income. Growth Funds would invest in companies that demonstrate a higher than average potential for growth. Income Funds These funds seek a high level of current income. They can either limit their investment to debt instruments or equity investments. You may therefore find Income Bond Funds investing in a mix of corporate or government bonds, whereas Income Equity Funds invest in stocks of companies that have a good history of paying dividends. 7

10 Things to consider before you invest Before you invest, you need to think about your reasons for investing and understand a few basic principles. People have all kinds of reasons for investing in mutual funds. Some want to finance their children s education or make sure they ll have enough money when they retire. Others may need some extra income each month. Still, others simply need somewhere to park their money while they decide how to invest it. If you re like most people, you probably have several different reasons for investing, and different kinds of mutual funds may be able to help you achieve each of them. No one type of fund may cover all your needs, but Unit Trust offers several funds from which to choose. If you have long-term goals like retirement, or your child's education, consider growth funds that seek to build assets over time. If your main concerns are safety and access to your money, Money Market Funds may be a good choice. They also provide a regular income stream. 8

11 Matching Funds to your Goals There is no such thing as the right investment - only investments that are right for you. Use this Table to match your reasons for investing with the kinds of mutual fund that may help you achieve your goals. Of course, your investment decision will depend on your individual financial situation, investment goals and other personal factors: Risk and Reward: Two Sides of the Same Coin Ideally, we would all prefer safe investments that offer high returns. Unfortunately, the two never go hand in hand higher returns always involve a higher degree of risk. Experienced investors recognize that a certain amount of risk is not necessarily a bad thing, because it gives them the opportunity to earn higher returns. Mutual funds run the gamut of risk and reward - from very low to very high - so it s important to choose funds with risk levels you feel comfortable with. When Will You Need Your Money? Time is an important factor in deciding how much risk you can undertake. The more time you have to invest, the more your money can do for you. Are you investing for 9

12 Matching Funds to your Goals (continued) long-term goals like retirement or a child s education, or are you seeking extra income in the present? Different goals have different time frames, so it is important to match your investment decision with your maturity period. As a general rule, the more time you have to invest, the more risk you can probably undertake, because time will help smooth the market s short-term ups and downs. Your age makes a difference as well. If you re approaching retirement, you may want to avoid high-risk funds, since you ll have less time to make up any short-term losses. On the other hand, if you re under thirty, you may feel comfortable investing in higher risk funds that offer greater return potential. 10

13 Types of Funds offered by UTC Here is some information on Unit Trust Corporation s mutual funds to help you decide which ones may be right for you. MONEY MARKET FUND (Second Unit Scheme) The Money Market Fund is the best investment for investors who want their money to work for them but are looking for easy access to cash, safety of capital, and at the same time earn high income. This Fund requires a minimum investment of $ which goes toward the purchase of units priced at $ Subsequent deposits may be at any time and in varying amounts. Deposits earn income daily which is credited to your account quarterly. The rate of income is quoted at the start of the particular quarter and is intended to reflect the minimum return that you can get. This Fund is flexible so it allows the investor to withdraw at any time without any penalties; there is even the possibility of earning a higher rate than publicised. No doubt, the Money Market Fund presents the most economical way to hold cash that you may need now, and yet still benefit from a high interest rate. 11

14 Types of Funds offered by UTC (continued) GROWTH & INCOME FUND (First Unit Scheme) The Growth & Income Fund is a great way to invest for the medium to long term. This Fund will give you the opportunity to earn income twice yearly and to benefit from the increase in the value of your investment over time. Whereas deposits made in the Money Market Fund go towards purchasing units at a fixed price, unit prices in the Growth & Income Fund fluctuate. These price changes are largely responsible for capital gains. An investor purchasing units today may realise that in 5-15 years his units are worth significantly more than the price for which they were purchased. Capital gains (growth) is the main reason for the Growth and Income Fund benefiting from an above average rate of return when compared to fixed income savings. The combination of growth and income returns makes this Fund an attractive investment for the medium to long-term saver. Unlike other balanced funds the Unit Trust Corporation s Growth & Income Fund has a safety feature which guarantees one s capital, three years from the date of purchase. 12

15 Types of Funds offered by UTC US$ CHACONIA INCOME & GROWTH FUND The Chaconia Income & Growth Fund though similar in principle differs from the Growth & Income Fund for the following reasons:- (i) Deposits must be made in US Dollars (ii) Investments are United States based; they incorporate a wide range of US securities (iii) The Fund is registered under the United States Securities & Exchange Commission. This Fund is an ideal hedge against a depreciation of the TT dollar. UNIVERSAL RETIREMENT FUND (URF) The URF is a unique product combining investment expertise with international management services. This product will seek long-term capital appreciation and will meet its objective by investing the Fund s assets in investment grade equities of both local and international companies and bonds and other high income securities with greater than average potential. The returns generated should therefore, be adequate to meet your retirement needs. 13

16 Getting your Investment Programme started Once you understand the basics of mutual funds, you re ready to start your investment programme. By now, you may feel ready to take the plunge and see how it feels to invest in mutual funds. If so, consider taking a modest sum of money, investing it in a fund you feel comfortable with and see how it works for you. Once you ve invested in a fund, you can track the progress of your investment through the regular statements received. Pointers for Beginners Begin gradually Start with a small amount of money and increase your investments as your experience and confidence grow. Use discipline Make a regular investment plan and stick to it; little by little, you can watch your mutual fund portfolio grow. 14

17 Getting your Investment Programme started (continued) Monitoring Your Investment Once you invest in a fund, you ll receive regular reports on the progress of your investment from the Unit Trust Corporation. To track changes in your fund s share price, check the business pages of the daily newspapers or call the UTC at 625-UNIT (8648). Building Your Mutual Fund Portfolio Here s an easy way to build your mutual fund portfolio and save money too. Choose a fixed amount of money and invest it regularly - say, every month or quarter. When you invest the same amount on a regular basis, you purchase more fund shares when prices are low and fewer shares when prices are high. This regular investment plan, sometimes called dollar-cost averaging, lowers your average price per share over time. 15

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20 Port of Spain San Fernando Chaguanas Arima 74 Independence Square Tel: (868) 625-UNIT (8648) Fax: (868) High Street Tel: (868) 657-UNIT (8648) (868) Yard Street Tel: (868) 671-UNIT (8648) Fax: (868) Sanchez Street Tel: (868) Fax: (868) Tobago Level 1 Scarborough Mall Tel: (868) Fax: (868) Westmoorings Level 1, West Mall Westmoorings Tel: (868) /7721 Fax: (868)