The Power of Compounding: Building Wealth with Unit Trust Funds

 

  Today we are going a bit technical to try and get behind one of the core concepts in investing: the power of compounding, and how you can harness it for your wealth building strategy.

But first a story.

So one day I’m in the lift at Acacia mall, with three young men. One of them is telling the others about a rich person “he knows” who is living large because he invested UGX 700 million (about 200,000USD) at the start of the year in a unit trust.

 Apparently this “rich guy” is now earning UGX 70 million monthly. Of course his friends were lapping it up!  Problem is elevator guy’s math was way, way off. At current unit trust returns, that investment would yield just over UGX 70 million ANNUALLY, not monthly.

I don’t know how I managed to keep a straight face because the conviction with which he said this was next level! That’s Kampala biboozi for you.

 Anyway, moral of the story is when it comes to personal finance, we need to pay attention to the smallest details. For one it prevents you from getting excited and making reckless investment decisions. Imagine withdrawing all your life savings and even taking a loan to invest……because some big mouth told you unit trusts return an interest of 10% per month!  

 

So how do unit trusts actually work? And what is compound interest?

Unit Trusts are a form of collective investment that allows investors to pool their funds to be invested. A professional fund manager then invests the pooled funds in a portfolio that includes fixed deposits, treasury bonds & bills, stocks, and other assets.

Compound interest is when your money earns interest not just on your initial investment, but also on the returns it has already generated. Over time, this creates exponential growth and this is the case with unit trusts.

Imagine you put UGX 1,000,000 into a unit trust that earns 10% per year. Here’s what happens:

1. Year 1: You earn 10% of UGX 1,000,000, which is UGX 100,000. Add it to your original money =UGX 1,100,000.
2. Year 2: Now you earn 10% not just on your original UGX 1,000,000, but also on the UGX 100,000 you earned last year. That’s UGX 110,000, so your total is now UGX 1,100,000+110,000= UGX 1,210,000).
3. Year 3: You earn 10% of UGX 1,210,000 = UGX 121,000, bringing your total to UGX 1,331,000.

And it keeps going like this. Each year, you earn interest on your original money AND the interest already earned.

Now imagine if you added 100,000 each month to the initial 1,000,000.

Each month, the balance grows by 0.833% (that is 10%/12 months) after adding the 100,000.

• After 1 year (12 months): Balance ≈ UGX 2.4 million
• After 2 years (24 months): Balance ≈ UGX 4.0 million
• After 3 years (36 months): Balance ≈ UGX 5.8 million

Consistently adding to your initial investment gives you more returns as demonstrated in the example above.

So yes, with compounding, that “rich guy” could eventually start to earn way  more than 70 million a year but that would be over the long-term and if he didn’t withdraw the money.

 

Why unit trusts are great for compounding

1. Automatic reinvestment: Dividends and capital gains are reinvested, accelerating growth.
2. Diversification: Your money is spread across different assets, reducing risk while compounding returns.
3. Affordable entry: You can start with small amounts and contribute regularly, giving your investment time to snowball.
4. Professional management and regulation: Fund managers handle investment decisions for you, and all schemes are regulated by the Capital Markets Authority. You can relax knowing no one is going to take off with your money!

 

✅ The Takeaway

To leverage the power of compounding:

• Start early: The earlier you invest the more time your money has to grow.
• Be consistent: Regular contributions, however small, can lead to significant growth. You won’t see the benefits of compound interest overnight, but with time, you will.
• Stay invested: Avoid withdrawing prematurely, as interruptions reduce the effect of compounding.
• Stay informed: Read blogs and articles on this and other investments; attend your unit trust fund’s AGMs. These help you make decisions based on accurate information and avoid costly mistakes.

Remember, in the world of investing, patience, logic, and accurate information are your best allies.

 Don’t be like the elevator boys!

 

Where you can open a unit trust account in Uganda: 

 Britam • ICEA • Sanlam • UAP Old Mutual • SBG Securities Uganda Ltd (Stanbic) • Cornerstone Asset Managers • Xeno Investment Management

 

 By Martha Songa

miss.songa@gmail.com