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Key differences between treasury bonds and unit trust investments
In Uganda, the minimum investment amount for government bonds is sh100,000. A unit trust, on the other hand, is an investment vehicle where fund managers pool money from many investors, invest it and later distribute the returns. Unit trusts are registered and regulated entities. In Uganda, some are associated with insurance companies.
Yosamu Barekye. (Courtesy)
By: Admin ., Journalist @New Vision
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OPINION
By Yosamu Barekye
As a passionate financial literacy trainer, I am encouraged by the growing conversations around saving and investment options. Recently, one discussion focused on the key differences between investing in government treasury bonds and investing in unit trusts.
In simple terms, a treasury bond is a relatively long-term government borrowing instrument that allows members of the public to lend money to the Government by purchasing bonds offered periodically. These bonds pay interest, known as a coupon, at rates determined on the auction date, with payments made every six months.
In Uganda, the minimum investment amount for government bonds is sh100,000. A unit trust, on the other hand, is an investment vehicle where fund managers pool money from many investors, invest it and later distribute the returns. Unit trusts are registered and regulated entities. In Uganda, some are associated with insurance companies.
The key differences in their features include:
- Flexibility of investment amounts and frequency: Treasury bonds require a minimum initial investment of sh100,000, with additional separate bond investments made in multiples of the same amount. Unit trusts may also have a minimum entry amount, but they generally offer more flexibility in how much can be added later and allow additional investments to be made within the same account.
In Uganda, the minimum investment amount for government bonds is sh100,000. A unit trust, on the other hand, is an investment vehicle where fund managers pool money from many investors, invest it and later distribute the returns. Unit trusts are registered and regulated entities. In Uganda, some are associated with insurance companies.
The key differences in their features include:
- Flexibility of investment amounts and frequency: Treasury bonds require a minimum initial investment of sh100,000, with additional separate bond investments made in multiples of the same amount. Unit trusts may also have a minimum entry amount, but they generally offer more flexibility in how much can be added later and allow additional investments to be made within the same account.
- Calculation and payment of returns, and the compounding effect: With treasury bonds, the investor is assured of interest payments, known as coupons, on specified dates. These payments are made to a separate account every six months until the bond matures or is sold. Unit trusts, however, may not offer a fixed rate. Instead, returns are determined periodically, often monthly and credited to the account balance. The credited returns can then earn additional returns, creating a compounding effect. This compounding benefit applies to unit trusts but not to treasury bonds. However, treasury bond interest rates are often higher than unit trust earning rates.
- Access to invested funds and the risk of losing interest income: With a unit trust, an investor can withdraw all or part of the money without closing the account. Any interest already earned is credited and can also be accessed. By contrast, accessing funds from a treasury bond before maturity requires selling the bond on the secondary market through licensed dealers or brokers. Depending on when the bond is sold, the investor may forfeit unearned interest and could incur a loss based on the prevailing secondary market rates.
- Security and default risk: Treasury bonds are generally considered more secure because the Government is less likely to default, even during periods of political changes. Unit trusts are managed by licensed private fund managers and regulated by the Capital Markets Authority. Because they are privately managed, they may carry a relatively higher failure risk than the Government securities, especially in extreme situations such as political instability.
Overall, both treasury bonds and unit trusts are good investment options. Each can be suitable depending on the investor’s objective, such as whether the goal is short-term or long-term investment, and how easily or frequently the investor may need to access the funds.
The writer is a financial literacy trainer
- Access to invested funds and the risk of losing interest income: With a unit trust, an investor can withdraw all or part of the money without closing the account. Any interest already earned is credited and can also be accessed. By contrast, accessing funds from a treasury bond before maturity requires selling the bond on the secondary market through licensed dealers or brokers. Depending on when the bond is sold, the investor may forfeit unearned interest and could incur a loss based on the prevailing secondary market rates.
- Security and default risk: Treasury bonds are generally considered more secure because the Government is less likely to default, even during periods of political changes. Unit trusts are managed by licensed private fund managers and regulated by the Capital Markets Authority. Because they are privately managed, they may carry a relatively higher failure risk than the Government securities, especially in extreme situations such as political instability.
Overall, both treasury bonds and unit trusts are good investment options. Each can be suitable depending on the investor’s objective, such as whether the goal is short-term or long-term investment, and how easily or frequently the investor may need to access the funds.
The writer is a financial literacy trainer