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Oran Hall | More mutual fund music

So, we are to see more mutual funds in Jamaica.

The GraceKennedy Group expects to add calypso to reggae on the local investment landscape with its impending partnership with the Trinidad and Tobago Unit Trust Corporation, the largest operator and manager of mutual funds in the Caribbean, to distribute mutual funds in Jamaica.

Is this anticipated increase in pooled investment options good music to the ears of local investors now quite used to such investment vehicles? JN Fund Managers registered a suite of five mutual fund products to the local market in 2015. Prior to that, the mutual fund market comprised a suite of mutual fund products out of North America.

Before that, there were just unit trusts. That market has exploded with Sagicor Investments through its Sigma Global Funds being responsible for 18 of them. Before long, we could have 100 diversified unit trust funds of various descriptions.

That is coming a far way from when there was just the Jamaica Unit Trust and its two funds. Amazing!

Am I sowing confusion talking about unit trusts and mutual funds alongside each other? I hope not. An investment professional once challenged and dismissed me when I stated that they were not one and the same.

Let us establish what each is.

A unit trust is an investment trust that pools the funds it derives from creating and selling units and invests them in diversified investment portfolios, or funds, for the benefit of the unit holders, or investors.

A mutual fund is an investment company that derives funds from selling redeemable investment shares and invests them in diversified investment funds, or portfolios, for the benefit of the shareholders, or investors.

The Financial Services Commission, FSC, describes both as collective investment schemes, and they also qualify as pooled funds.

Because a unit trust is an investment trust, it is governed according to the terms of a trust deed and has a board of trustees, which has ultimate responsibility for its policies and operations. Its day-to-day operations, including investment management, rest with a management company.

Ultimate responsibility for the policies and management of a mutual fund rest with the board of directors, but it also has a management company responsible for its day-to-day management, including investment management.

Thus, we have two investment vehicles set up under different legal arrangements but which are similar in many ways. This explains why investors buy units in a unit trust and shares in a mutual fund.

Whether investors opt to invest in unit trusts or mutual funds, their money is pooled with that of other investors to buy investment instruments, which collectively, make up investment funds, or portfolios.

As is becoming more and more evident, as the market develops, new funds are introduced, giving investors a wider range of choices, not just by type of instruments, but by the market in which they are located as well as by how the various instruments are combined to form investment funds.

Increasing the funds available gives investors more options to diversify their portfolios, and increasing the amount of unit trusts and mutual funds of necessity increases the number of fund managers, thus increasing the scope for investors to diversify by management considering that mangers have different philosophies, resources, and investment styles.

Notwithstanding the benefits, investors could have a hard time deciding how they invest in these collective investment schemes. Even well-informed and capable investors must devote time to assess the growing and wide-ranging funds that the market is making available to them.

In this increasingly competitive market, distribution assumes great importance. Good performance and funds that seem to be able to meet the investment objectives of significant elements of the investing public will not be enough to stake out a significant position in the market.

The mutual fund market has a far way to go to catch up with the unit trust market, or perhaps we need not put them in opposition to each other but rather see them as two very similar markets based on different legal structures jointly offering investors opportunities to derive several similar benefits.

The benefits include the following: dedicated professional investment management; protection of the investor’s interest due to the separation of custodial arrangements, management and ownership, considering that it is the investors who jointly own the investment assets in proportion to the level of their investment; liquidity of the investments, transparent valuation of the units and shares; the relatively small amount of funds required to make an investment; diversification in multiple ways; and access to types of investment instruments that would not normally be available to small and less sophisticated investors.

– Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and

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