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Source: Association of Collective Investments

The local unit trust universe is growing by the month. There are currently close to 700 unit trusts from which to choose, and fund managers are getting more and more adventurous in their offerings to try to stand out from the crowd.What may look like a mind-boggling degree of choice actually translates into a relatively simple breakdown of different fund types.

At the first tier, funds are classified as domestic, worldwide or foreign funds. Domestic funds invest largely in South African markets (85 percent of their assets), while foreign funds invest largely outside of South African markets (85 percent of their assets must be in non-South African markets). Worldwide funds can invest in a mixture of local and foreign markets.At the second tier, funds are classified as equity funds, asset allocation funds, real estate funds or fixed interest funds By far the widest range of unit trusts are equity unit trusts. They give an investor more than 75 percent exposure to the stock market.

General equity unit trusts can invest in a broad range of stocks, while specialist equity funds
(found in different sub-categories) invest in a much smaller universe of shares - for example, only in resources shares. Unit trust funds in both of these unit trust sub-categories are expected to deliver medium- to long-term capital growth.

The number of specialist equity funds has burgeoned during the past few years. There are a number different specialist sub-categories, including mining and resources, financial, value, growth, smaller companies, large cap and varied specialist equity funds (a catch-all for anything that doesn’t fit anywhere else).Asset allocation or managed funds offer investors exposure to the different asset classes of equities, property and fixed interest They are, in turn, divided into prudential funds, which have to adhere to the Pension Funds Act’s prudential guidelines, and flexible funds, which do not have any category limits in terms of how much they can invest in each asset class, but may set their own mandate limits.They are, in turn, divided into prudential funds, which have to adhere to the Pension Funds Act’s prudential guidelines, and flexible funds, which do not have any category limits in terms of how much they can invest in each asset class, but may set their own mandate limits.

They are, in turn, divided into prudential funds, which have to adhere to the Pension Funds Act’s prudential guidelines, and flexible funds, which do not have any category limits in terms of how much they can invest in each asset class, but may set their own mandate limits. Prudential funds are further divided into high equity, medium equity and low equity funds, depending on their mandate to invest in equities. Another sub-category within asset allocation funds is that of the targeted absolute and real return funds. These funds also invest across the asset classes but target a specific return, such as the inflation rate plus three percent.

Real estate funds invest at least 50 percent of their assets in listed property.

Fixed interest funds are those that invest in interest-bearing financial assets and include bond, income and money market funds. There are also funds that invest across these interest-bearing assets and sometimes include listed property. These funds are classified as varied specialist funds Bond funds offer a broad exposure to the bond and money markets. Income fund managers are subjected to more restrictive investment boundaries. They have to invest in shorter-dated bonds and money market instruments because the aim of the fund is to provide a reasonably steady income stream and total returns in excess of the money market. A priority is placed on capital preservation.Money market funds cannot invest in money market instruments or bonds that have a maturity of more than a year. They offer investors a popular, higher interest rate alternative to traditional bank savings vehicles and are often used to park money for a relatively short time.

Funds of funds invest in the units of other unit trust funds. They are more costly than directly investing in the underlying unit trusts but offer an investor a broader, carefully selected exposure to a diversified range of unit trusts.