How do unit-linked funds work?
A Unit Linked Fund is a pooled investment that allows you to combine your money with other investors. Any money you invest is used to buy units in funds.
A pooled investment enables you to invest in a wider range of investments than might be possible if you were investing as an individual. You will share any gains or losses of the fund with the other investors.
The history of ULFs began in 1773 in the Dutch Republic (Netherlands) by a businessman called Abraham van Ketwich who formed a trust with an idea to provide small investors with an opportunity to diversify.
Suddenly a person with limited resources could invest with much fewer risks thanks to the “strength” of the diverse investments.
After all this time ULFs following a similar strategy and still are very popular products.
As any other investment instrument ULFs have advantages and disadvantages.
The main advantage for investors is risk reduction, as the investments are distributed among a large number of different organisations. ULFs allow investors with small savings/capital amounts to join the financial market.
They provide liquidity and offer flexibility by choosing different categories of investments from equities, commodities, fixed return products, and money markets.
On the negative side, investors in ULFs must pay various fees and expenses plus they must rely on the decisions of their professional managers. Also, all ULFs are invested in specific sectors or under the banner of a managed fund, which often comprises other sector orientated ULFs. While managed funds offer the widest diversification they often result in higher annual management charges (AMC) as underlying assets also charge their own AMCs.
In practice, all the managers tend to be well–regulated and depend on their reputation which ensures client confidence when investing.