If you've cooked a great meal you know it's the result of combining a little bit of this and a little bit of that. That's basically what most funds or unit trusts are - a little bit of shares from Company A, a little bit of shares from Company B, C, D and sometimes all the way to Z.
But let's start at the beginning. You and I and a bunch of other investors invest a sum of money once off or on a monthly basis. All this money is pooled and used to invest in the stock market - locally and abroad. The money is managed by scarily clever individuals called portfolio managers, and their teams. They buy shares and other asset classes (like bonds and money market instruments but we'll leave those for another day) on behalf of you and me.Why would I invest in unit trusts / funds and not buy shares directly?
The advantages of investing in the stock market through unit trusts are numerous. For a start, it's much cheaper this way. Secondly, there's a lot less risk. You see, your unit trust or fund is made up of lots of different shares. If one share performs badly, it's buoyed by the good performance of another.Take a look at the top ten shares of one of the oldest funds in the country
Naspers Ltd, Sasol Ltd, British American Tobacco, Nedbank Group Ltd, ABSA Group Ltd, Old Mutual Ltd, Investec Ltd, BHP Group Plc, FirstRand Ltd, Glencore Plc.
And that's just the top 10. There's also a bit of Foschini Retail Group, Tsogo Sun and Discovery in there too.
There are other funds that invest in one particular industry like mining, financial services, gold or technology. Those are a bit riskier because they are invested in one industry and not spread across a few.
As a newbie to the unit trust world of investing it's best to stick to a fund that is well diversified. Then sit back and let the experts do their job!