Consider this evocative quote attributed to the Sage of Omaha, Warren Buffet: The stock market is designed to transfer money from the Active to the Patient. It is not about constantly beating market returns but securely building wealth over the long term. Bank deposits offer safety; equities, growth. Unit trusts offer both—with fewer extremes for those with neither time nor talent for stock-picking, unit trusts offer a convenient alternative.
Unit trusts allow investors to pool their money to access a professionally managed, diversified portfolio of assets—such as equities, government securities, or corporate debt—based on the fund’s objective. Instead of buying individual securities, investors buy units in the fund and share in the returns as the value of the underlying assets grows or generates income.
According to the UTASL, the aim is to deliver long-term returns that outperform inflation and bank deposit rates. Diversification reduces exposure to individual asset risk, and professional fund managers handle investment decisions, allowing investors to benefit from market expertise without direct involvement.
We looked at publicly available performance data on UTASL’s websites to see how the funds performed over the last five years amidst the worst economic crisis in post-independence Sri Lanka.
The All Share Index gained 21% annually over five years. Just six unit trusts did better. CTCLSA Equity Fund (an open-ended balanced fund) returned an annual average 22.4%, Astrue Alpha Fund (an open-ended growth fund) returned 23.4%, CAL Quant Equity Fund (an open-ended growth fund) 24%, JB Vantage Value Equity Fund (an open-ended growth fund) 24%, Arpico Ataraxia Equity Income Fund (an open-ended balanced fund) 26.2%, and the First Capital Equity Fund (an open-ended balanced fund) 26.6%.
Nine other funds returned over 15% annually over the last five years: the Ceybank Century Growth Fund 15.01%, the NDB Wealth Income Plus Fund 15.33%, the Ceylon Financial Sector Fund 15.41%, the Assetline Income Plus Growth Fund 16.30%, the First Capital Wealth Fund 17.16%, the NDB Wealth Income Fund 17.32%, the CAL Balanced Fund 17.48%, the NDB Wealth Gilt Edged Fund 17.64%, and First Capital Fixed Income Fund 19.65%. While the S&P SL20 index of more liquid stocks gained 10.6% annually during these five years, about 30 other funds gained 10-15% annual returns.
In 2024, the All Share gained 58.5%, and only three funds beat this return. The Ceylon Financial Sector Fund (an open-ended equity index/sector fund) returned 64.2%, the Senfin Financial Services Fund (an open-ended balanced fund) returned 63.4% and the JB Vantage Value Equity Fund (an open-ended growth fund) 61%. However, four other funds returned more than 20%, eleven over 30% and ten between 40-50%.
Few individual investors beat the market. Unit trusts, by contrast, offer diversification, professional management—and consistency. Unit trusts offer a low entry point and allow flexible top-ups. Investors can add or withdraw funds as needed, with most open-ended funds imposing no penalties for redemptions. In many cases, returns are tax-free.
According to the UTASL, unit trusts suit long-term goals, particularly in equity funds; they are not ideal for short-term needs due to market fluctuations. Investors should avoid using funds earmarked for daily expenses. How much to invest depends on individual financial goals and risk tolerance. Unit trusts complement other options like savings accounts, deposits, or property and can play a key role in building long-term wealth.
Unit trusts in Sri Lanka fall into two main categories based on how investors can enter and exit the fund: open-ended funds and close-ended funds. Open-ended funds allow investors to buy or sell units at any time at the prevailing Net Asset Value (NAV). Fund managers issue units continuously and do not set a maturity date. Investors transact directly with the fund management company. In contrast, close-ended funds operate with a fixed maturity period. Fund managers open these funds to investors for a limited subscription window, after which they close the fund to new subscriptions. Investors cannot exit these funds freely unless the fund trades on a stock exchange. If listed, units can be bought or sold on the market, often at a discount to NAV. If unlisted, managers may allow partial redemptions after a specified period.
Under these two structures, fund managers offer a range of unit trust types based on investment strategy and asset allocation. Gilt-edged funds invest exclusively in government securities, including Treasury bills and bonds and repurchase agreements backed by government instruments. Offering returns shy of bank deposits, these funds tend to attract investors more concerned with preservation than performance. Fund managers distribute dividends quarterly, semi-annually, or annually.
Indexed funds take a different approach. They invest in equities that replicate a specific index, such as the S&P SL20, by matching the composition and weightings of the constituent stocks. Some managers may also create custom indices and restrict investments to those stocks. These funds aim to track the performance of the selected index without attempting to outperform it. They carry slightly less risk than actively managed growth funds and suit investors who want broad market exposure without choosing individual stocks.
Investors seeking higher returns from fixed-income instruments often turn to income or high-yield funds. These funds allocate a larger share of capital to corporate debt, which tends to offer higher yields than government securities or bank deposits. Fund managers also hold a portion of the portfolio in treasury bills, repurchase agreements, and deposits. Investors receive semi-annual or annual dividends, making these funds appealing to those who want a steady income with a higher yield than traditional fixed-income options.
Balanced funds expose equity and fixed-income markets, offering a blend of income and capital appreciation. Fund managers adjust the proportion of equity and debt based on market conditions and strategy. These funds appeal to investors with moderate risk tolerance and a medium- to long-term outlook. While they typically distribute dividends annually, they may also apply entry fees.
For investors focused purely on long-term capital growth, growth funds concentrate most of their investments in equities, allocating a smaller portion to fixed income. Fund managers select companies with strong earnings potential to generate returns exceeding inflation. These funds carry higher risk and may not offer regular dividends. Investors can realize gains by redeeming units when satisfied with performance.
Money market funds cater to individuals and corporations looking to earn returns on short-term cash holdings. These funds invest in instruments such as treasury bills, commercial paper, bank deposits, asset-backed securities, and repurchase agreements. They offer high liquidity and generate tax-free returns, functioning as a competitive alternative to savings accounts. Dividends may be paid once or multiple times a year.
Sector funds offer exposure to a specific industry, such as banking or manufacturing. Fund managers invest in selected equities within that sector based on expected performance. They do not need to include every company in the sector; instead, they focus on those likely to outperform. These funds allow investors to take a targeted position when they anticipate strong performance from a particular segment of the economy.
Disclaimer:
This story uses publicly available data not meant to represent advice or suggest transactions in unit trusts. It is not a substitute for independent judgement; readers should consult independent investment advisers. Neither Echelon nor the investment funds mentioned in this story accept any liability for any loss arising from the information presented here.