QUESTION: I read your column in the Sunday Gleaner and find it informative. I would like your advice on the unit trust money-market investment.

I have bought some units with one of the banks so I have a little idea how it works and the income I have made so far is good, but, as a young man in my 20s, I am a bit scared, especially after hearing the news of certain investment companies collapsing. So, my question to you is: Do you think it is safe to invest in unit trusts? I want to buy more units; is it worth it?

PFA: A unit trust is an investment trust that sells units to the public and pools the proceeds to invest in a variety of investment instruments which are grouped into portfolios or funds based on type of security or investment objective. By their very nature, unit trusts tend to be safe.

Unit trusts are similar to mutual funds, which are investment companies that sell shares and invest the proceeds, much like the unit trusts do. The main difference is in the type of vehicle through which they operate - one operates through a trust, the other through a company.

Some of these pooled investment funds are open-ended, meaning they sell and redeem units constantly either directly or through agents. Others are closed-ended. They tend to have a limited life and trade on stock exchanges.

Separation of ownership

Unit trusts are safe in the sense that there is a separation of ownership, management, and custodianship. The investors are the collective owners of the assets of the funds, though ownership is registered in the name of the custodian; the management company manages the investments and manages the funds on a day-to-day basis; the custodian, charged with the responsibility of holding and securing the assets, is usually a trust company.

The management company has a board of directors concerned with overseeing its affairs. The board of trustees exercises authority over the investment funds through the power vested in it by the trust deed.

This separation of functions is a mechanism that protects the funds and their owners - the unit holders. The unit holders will not lose their investment if the management company fails because their units cannot be sold to settle its debts.

So, it is safe to invest in unit trusts.

You have bought units in a money-market fund. To the extent that there is only one price, that is, one price for buying and selling, you do not risk losing capital if you sell your units, except in cases where there is a penalty if units are sold before the expiration of a prescribed period.

Because money-market funds tend to be made up primarily of short-term interest-bearing securities, their values do not decline and, in fact, increase, as interest is earned daily on the securities.

If, however, you were to invest in a growth fund made up solely of equities, or of real estate, or a combination of both, you would risk losing capital if the values of those assets declined due to market conditions. In that sense, investing in unit trusts may not be safe.

Because I do not know your investment objectives or how you have allocated your money among the various types of investments, I am not in a position to say if it is worthwhile for you to put more of your funds into unit trusts.

Diversified portfolios

There are, nonetheless, good reasons for investing in unit trusts. The investor is able to benefit from their diversified portfolios and is able to select a fund that has similar investment objectives to his.

If the fund is not made up of several types of investment products, diversification may be achieved by investing in several funds to achieve his asset allocation goals.

Unit trusts offer ease of management because experienced professional managers do the required research, trade and manage the portfolio. This frees the investor to use his time in other meaningful ways.

These are long-term but liquid investments, so the investor may readily sell his units in a weak market or in an emergency. Furthermore, investors may invest in them at any time during business hours, even if they have limited resources.

Management and sales charges make unit trusts an expensive investment option but, considering their many benefits, they are very good for investors, particularly inexperienced, small, and busy ones.

Oran A. Hall offers free advice on money management and personal finance. Email: finviser.jm@gmail.com