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FAQ's about Funds in Sri Lanka

Funds and Unit Trusts - I am confused?

A Unit Trust is a trust fund that collects money from interested parties and invests in various securities such as shares, debentures, Treasury and Money Market instruments and so forth. These securities are invested in portfolios so that the risk is diversified away whilst return is maximized. There are various funds in Sri Lanka that attract different investors with different risk profile. As the investment objective of these funds are different, each fund will have different risk and return profile. These objectives need to be clearly available to the investors before the make any decision. The fund generates the income in terms of dividend, interest and capital gains. This is then distributed to the unit holders in proportion to the number of units owned.

They are an institution independent from managers who monitor the manager's conformance with the trust deed and regulatory requirements. They also create and cancel units at the request of managers, have custody of trust assets and also ensure registration of unit/shareholder. Generally, banks will become trustees of unit trust companies ( fund management companies or funds as you may call it)

What are the categories of Unit Trust Funds?
Unit Trusts or Funds can be classified in various ways. They are

1. According to the structure
2. According to the fund objectives

What are open ended funds?
An Open-end Fund is one that is available for subscription on an ongoing basis. These do not have a fixed maturity. Investors can conveniently buy and sell units.

What are Closed-end funds
This is a fund which has a fixed maturity. Investors can only invest during the initial offer period (IPO)

What could be the funds’ Investment Objectives
Various funds have various objectives and as a result should be carefully chosen.

Growth Funds : The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their funds in equities. Growth schemes are ideal for investors who have a long term outlook and are seeking growth over a period of time.

Balanced Funds : The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion agreed at the begining. These are ideal for investors looking for a combination of income and moderate growth.

Income Funds : The main goal of income funds is to provide current income at low levels of risk.

Is there a risk in these funds ?
Different funds have different risk profiles, which is stated in its objective document. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Stock market related investments cannot be termed safe with certainty; they are inherently risky. Investors should choose their fund investment depending on their risk appetite. Equity Funds are open to market risk i.e. there is a possibility that the price of the stocks in which the Fund has invested may decrease. Of course, the prices may also go up, making it possible for the Fund to earn profits

Is my return guaranteed?
It is not possible for any fund manager to guarantee the returns in a volatile market. However, they might attempt to generate sufficient returns. The performance quoted is past reports is not a guarantee for future results. Unit Trust Funds are subject to certain market risk. Investment returns and principal value of an investment will fluctuate so that an investor's Units, when redeemed, may be worth more or less than original cost. Current performance may be higher or lower than the performance data shown.

Do I get tax benefits on this investment as I am a tax payer?
Both dividend and capital gains are currently exempt from tax liability.

Can I invest in Funds ?
Unit Trust Funds can meet the investment objectives of almost all types of investors. Any investor who can take some risk while aiming for substantial growth of capital in the long term will find Growth funds a better option for them.

Certain risk-averse investors, who prefer a steady income in the medium term can choose to invest in balanced funds. There are various categories of funds for everybody whether you are very cautious or very adventurous in your risk score.

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