Unit Trust industry stable and secure
The Unit Trust industry is stable and secure for investors as
inflation and interest rates decreased with the national economy
recording a positive growth.
The mass market has realized the potential of the stock market since
the Unit Trust is one of the safest financial instruments where people
could invest in, while enjoying a higher return on their investment.
With the steady growth and economic developments taking place in the
country the former volatile situation in the financial sector has
ceased. At present there is a positive impact that Sri Lanka will
experience a rapid economic growth within the next few years.
Unit Trusts were introduced to Sri Lanka in 1992. However due to the
war, which prevailed for over three decades impeded the growth of the
financial sector and the country was unable to promote Unit Trust Funds
among local and foreign investors.
Countries such as China and India also launched Unit Trusts at the
same time when Sri Lanka introduced Unit Trust, but they made speedy
advances from it. Since peace and stability has returned to the country;
Sri Lanka too could make headway in the Unit Trust industry.
The Colombo Stock Exchange (CSE) together with the Securities and
Exchange Commission of Sri Lanka (SEC) has modified its laws and
regulations to encourage the Unit Trusts. Previously limited foreign
participation is now available for Unit Trusts and it has already
benefited the industry.
Majority of the public has not understood the concept of the Unit
Trust due to lack of awareness. However, during the post war scenario
the investors have shown a commendable response. Unit Trusts are an
alternative financial instrument with less risk and it is a preferred
mechanism for householders to invest in the stock market or in debt
The public are slowly identifying the potential in the Unit Trust
industry and this will be an excellent gateway for companies that wish
to list on the CSE to raise capital.
An investor can enter into the unit trust market with a small amount
of capital. Even for a small investor it is easy to enter into the
market since the investor need not have to select in which company the
investment should be made and need not have a frequent knowledge about
the capital market.
These funds are managed by fund managers. The fund managers are under
the purview of the SEC. There is much potential for the fund managers to
manage the pension industry and high net worth fund managers. These
funds could be converted from savings to investments through
professional fund managers.
The first unit trust was launched in the city of London in 1868 and
from small beginnings this movement has snowballed to a great extent
worldwide in many countries. This introduced the idea of selling a
“unit” or participation in a trust fund which can be traced in Great
Britain to the foreign and Colonial Government Trust, formed as an
unincorporated trust in the same year.
The significant features to be noted in a Unit Trust are:
A Trust Deed is executed between a licensed Fund Management Company
(FMC) and a reputed financial institution called Trustee
The management of this trust fund is placed in the hands of the FMC
which is licensed by the Securities and Exchange Commission of Sri Lanka
(SEC) with a minimum issued capital of Rs 25 million.
Investing public invest in the trust through the FMC and the
investors capital is held by the trustee until it is withdrawn by the
investor. Investments could be in joint names and also in the names of
Investors in the trust are allotted ‘units’ for their investments
based on the selling price calculated at the end of the day. This
pricing mechanism is called forward pricing. The investors are provided
with a Unit Certificate commencing the investment. In more recent times
the units are issued in a script less format.
There is no par value for units although usually initial offer price
of a trust fund is fixed at Rs 10 per unit. The unit value is based on
the Net Asset Value (NAV) of the securities held by the trust on the
date of valuation.
FMCs’ publish in newspapers the buying and selling prices of units of
a particular trust which gives an indication of the transaction price to
the investors in Unit Trusts.
The number of units outstanding in a trust can vary up or down
depending on the investor activities in the trust fund. The unit trust
funds operating in Sri Lanka are open ended, close ended and listed
funds and capable of issuing any number of units without any limitation
for open ended funds and limited number of units for close ended funds.
FMC maintains the investor’s personal details and the transaction
details to provide accurate information and service to investors in the
trust. When the investors apply to withdraw their investments FMC
verifies with the details and check their identity before payments are
made. Usually investors can withdraw their funds within a period of 3 -
4 days from the date of their withdrawal application.
The value they realize for their units is based on the appropriate
managers buying price for that transaction.
The trustee, and the SEC monitors the activities to ensure all
transactions are within the provisions of the deed and related
securities law in the country.
FMC declare dividends based on income realized and accrued to keep
the investors to enjoy a return annually.
However, some funds are long-term growth oriented funds and may not
declare dividends on a regular basis. The growth is achieved due to the
nature of the asset class in which trust fund makes its investments,
such as shares of growth companies.
Unit Trust industry in Sri Lanka
In Sri Lanka the unit trust concept was first introduced in 1991 when
the share market was in its early stages and particularly soon after
foreign investors were allowed to invest in the Sri Lankan stock market.
Initial funds launched in 1991 - 1992 were balanced funds which
primarily invest in share market and fixed income securities.
Public awareness about unit trusts in Sri Lanka is found to be lower
since the formation of unit trusts in 1991. The Unit Trust Association
of Sri Lanka has conducted awareness campaign from time to time for the
benefit of the public to know about unit trusts and to use them to save
their money for their medium to long-term financial requirements.