Key considerations before investing in an actively managed Singapore unit trust
One of the most frustrating things about investment in actively managed funds, indeed the investment world as a whole, is that there is often too much – rather than too little – information! And of course not all of it is helpful. This can make it hard to decide even where to start. And yet there are some excellent actively managed unit trusts, and any potential investor who dedicates the time to do research on them, can enjoy some solid returns. It goes without saying that an investor should be fully informed about any investment products that he or she is thinking to buy. Getting professional advice is also, at the very least, worth considering as an option.
Personal Investment Profile
Before making any investment decision whether alone or in consultation with a professional advisor, the first step is to draw up a ‘holistic’ financial plan. Make sure that all areas of your personal finances are taken into account. Determine your personal goals and objectives, as well as your risk tolerance and time frame. It is imperative that your personal goals are in line with those of the unit trust or trusts which you are thinking about selecting. And always ensure that things like your emergency funding is in place before making any commitments to invest money. The Monetary Authority of Singapore (MAS) has a website, mas.gov.sg, which has some useful pointers for doing this pre-investment preparation.
It makes sense to take the economic environment into account before deciding on a fund. For example, if interest rates are very low, as they are now and have been for quite some time, you might think about a high dividend fund. In the middle of a global recession, however, you might want to consider taking a position in an aggressive equity unit trust – it is more likely to be depressed, but recover strongly than a more conservative unit trust. Whatever your strategy, however, you must be reasonably comfortable with the fund manager and his/her views. As everyone knows, it is exceptionally challenging to precisely time the market with your investments. But planning, common sense, and awareness of what is happening in the world around you, are never a bad thing!
Risk Characteristics of Fund
Obviously all investments involve some degree of risk. Moreover, all unit trusts can be generally classified into conservative, moderate (or balanced), or aggressive, which applies to the risk profile of the fund and fund manager. While it is a rather gross simplification to say that the reward for taking on more risk is potentially bigger return, there is some element of truth. In any event, an equity unit trust will under normal market conditions entail more risk than a bond unit trust, and certainly, over the long term, most equity funds would be expected to have a higher return than any bond fund. A fund holding a lot of cash, particularly with global interest rates at exceptionally low levels, should naturally be categorized as conservative, or at the very least, more conservative than a bond fund. Evaluating the risk of the fund is essential to make sure that it really fits your preference.
Every investment comes with specific fees and expenses which in the case of a Singapore unit trust involves a transaction cost, which is a charge on the purchase (and in the future a charge on the sale) of any fund. This ranges from 1.5% ~ 5%. There is commonly a fee charged on any switching between funds, which would be a minimum of 1%. The fund itself will be paying a management fee to the asset manager, and this would typically be disclosed in the prospectus. These costs must be taken into account when calculating the return on any unit trust, as such ‘hidden costs’ can seriously erode performance.
Fund performance matters, but remember that last year’s top performing funds may be way down on the list for this year! Long-term returns are a much better guide to performance over time. The average rate of return is sometimes a good indication, although again, it should be the average over at least a few years. Because the fund will have certain investment objectives, make sure you know the benchmark being used, because that can drastically impact projected and real returns.
It is plain common sense to compare the long-term performance among similar funds in the market. The category average return will show you how a particular unit trust measured up against peers. Explore the reasons for over- or under-performance.
Be aware of internet scams. There are a number of entities, of which some even have recognized licenses, that use highly publicized news to lure in potential investors. Some of these entities have websites that appear quite legitimate. One of the easiest ways to detect a scam is to google the company name followed by the word ‘complaints’. See if anyone you know has had dealings with the entity. Always ask questions, check and double check the credentials, expertise and experience of the fund managers, and the asset management company before you invest!