Unit Trusts Singapore: Are they truly as bad as you think?
Unit Trusts are some of the most sought after investments vehicles in Singapore, as they provide an easy way of gaining exposure to the broader market, at low costs. Simply put, they offer a way of investing money through professionals and investment management companies.
So what is a Unit Trust?
A Unit trust is a fund made up of investors’ money, invested in a variety of financial assets. These types of unincorporated mutual funds, pool money from investors to form a fund, which in return invests in various assets to generate profits.
Profits generated by unit trusts go straight to individual unit owners, whose funds were used to form the fund. In this case, an investor is usually the beneficiary under the trust.
The success of any unit trust depends on the company managing it or the fund managers. The most common types of unit trusts are usually pegged around properties, securities, mortgages and cash equivalent. The underlying value of an asset in any unit trust portfolio is morally stated by the number of units issued, multiplied by the price per unit.
Transactions fees, management fees are some of the costs associated with these types of investment vehicles.
How Unit Trusts Operate
Unit trusts are made up of equal shares usually referred to as ‘units’, which have a price called Net Asset Value (NAV). When a person invests in a unit trust, they are buying the units. For example, if you invest SG$1000 in a fund with a NAV of SG$100, you will end up owning 10 units.
The net value of a unit trust is calculated at the end of each day by summing up the value of all investments minus liabilities that the fund holds.
Fund managers run unit trusts, with the sole goal of ensuring growth in the Net Asset Value from which investors generate profits. Fund managers are also tasked with the responsibility of buying stocks, bonds or a combination which in this case are referred to as fund holdings.
With unit trusts, investors don’t own securities in a portfolio directly. Ownership of the fund depends on the number of units that one holds in this case. As the value of the fund increases or decreases, so does the value of each unit increase or decrease
Returns in unit trusts is usually in the form of income distribution and capital appreciation. Each unit earn earns an equal return determined by the level of capital appreciation or income distribution. The amount of money that one gets to walk away thus depends on the number of Units owned.
Unit trusts are ideal for investors with savings that they wish to invest and have no time or inclination to hold portfolios of direct investments or shares. These vehicles of investments provide a secure reputable way of putting money to good use. They also provide an easy way to access a wide range of investments that most of the time may not be available.
Things You Should Know About Unit Trust
Unit Trust Objective and Parameters
Before you invest in any Unit trust, you should have an idea about the fund’s objective as well as its investment parameters. The objective outlines the goal of the fund which can be described in terms of underlying assets as well as geographical region and industrial sector of focus.
For example, a fund could be focused on investing in growth companies based in specific geographic region tied to a particular industry. The fund manager, in this case, is tasked with the responsibility of looking for investment opportunities that meet the objective that investors are aware of.
By having an idea about a unit trust objective, you should be able to make informed decisions based on the fund’s investment strategy.
Net Asset Value
Net Asset Value as discussed earlier is the value of the fund’s assets, minus expenses and liabilities. The price of each unit is calculated by taking the NAV and dividing it by the total number of units. Understanding NAV allows one to know the number of units they are entitled to in a fund, depending on capital invested.
Total returns that one is entitled to, depends on the appreciation of a unit trust’s holdings as well as dividends or other income that might be available. Yields are typically annualized’. However, you should check if returns provided are net of fees and charges.
Sharpe Ratio is a metric that measures the performance of a unit trust relative to the risk taken by the fund managers. The higher the ratio, the higher the returns one is guaranteed. While funds can have the same rate, any investment should always be based on the amount of risk taken.
Beta is a metric that measures a unit trust volatility, relative to the whole market at large. Simply put, it is a measure of how an investment tracks the swings in the market. A fund that tracks the market with precision would most of the time have a beta ratio of 1.
A beta ratio of more than 1 indicates that a fund is more volatile than the market, while a less than 1 ratio means the fund is less volatile.
Total Expense Ratio
Total Expense Ratio measures the amount of expenses incurred as a fund moves to generate returns for investors. Before any profits are deposited in unitholders accounts, fees have to be deducted.
Common fees Charged by Unit Trusts
The costs are payable upon one buying a fund and may range between 1% and 5%, depending on the fund.
Payable upon selling unit holdings or when redeeming. It also ranges between 1% and 5% of one’s investments. Some funds may lower the redemption fee upon one holding the units much longer
Switching fee is payable when one switches from one fund to another, managed by a different manager.
The management fee is usually charged annually as fees for the effort put in place to manage a fund. It is often 0.5% to 2% of the fund’s Net Asset Value.
Types of Unit Trusts
These types of unit trusts seek to provide investors with exposure to a vast array of asset classes. A stable unit trust boasts of a portfolio of equities, fixed income securities, and cash.
An equity unit trust has a concentration of investments in equities or securities of listed companies. The performance of these types of funds depends on the performance of the overall market. A rising market would most of the time result in an increase in the value of each unit and vice versa.
Exchange Traded Fund
An Exchange Traded Fund is a type of unit trust whose objective is to achieve the same return as a given market index. Unlike other investment vehicles, they come with low expense ratio and can be bought and sold throughout a trading day.
Fixed Income Funds
Fixed Income Funds are unit trusts that invest primarily in fixed income products like bonds and money market instruments. Their primary objective is to provide investors with a regular source of income.
Shariah Funds are ethical unit trusts that provide Shariah law compliant investments. This unit trusts don’t invest in companies involved in activities, products or services tied to gambling or alcoholic beverages.
Benefits of Unit Trusts
There are many reasons as to why unit trusts are becoming increasingly popular with professional and novice investors in Singapore. People invest in unit trust not only because professional managers manage them but because of the following reasons:
Unit trusts provide a way of reducing investment risk by a form of diversification. Most funds, in this case, provide investors with exposure to a broad portfolio of asset class not limited to shares of companies bonds or forex markets.
Spreading an investment reduces the overall risk of an investment thereby providing an easy way to maximize returns. The more investors there is in a unit trust, the higher the amount of resources that a fund can use to spread its risk to a broad asset class.
Unit trusts, unlike other investment vehicles, provide an opportunity to invest in valuable financial instruments at reduced costs. Investors are usually able to purchase shares that a fund has invested in, with a single purchase order.
Most unit trusts have transparent product fees with no additional penalties in case one redeems his/her position. Unit trusts are also designed for ordinary income earners as they don’t require lump sums of money. They also tend to be tax efficient and convenient for people setting up retirement annuities.
Reduced Investment Risk
The fact that they spread funds across many investments goes a long way in reducing the risk that an investor gets exposed to. In case, one holding is experiencing a downturn; its underperformance will most of the time be offset by outperformance of other holdings that the trust has invested in.
Easy To Sell
Unit Trusts don’t a have restrictions on when one can enter or leave a position. If you need money, you would be able to sell your position without having to give an extended notice period. Once you exit a position, you can have your money in days.
Liquidity is another attribute that makes unit trusts desirable as investment vehicles. What this means is that you have access to your money at any given time.
Unit trusts are ideal for people who are just getting started into the business of investing. The fact that they are managed by professional’s, with vast experience, means one does not need to grasp all it takes to be a successful investor, to venture into the world of investing.
Unit Trusts, therefore, provide a way of creating wealth while tapping other people’s expertise irrespective of the amount of capital invested. Professional manager’s license, background, and knowledge go a long way in ensuring that decision making is structured to generate profits.
Even though managers make decisions on your behalf with regards to where to invest, they cannot access your cash. The legal structure of unit trusts is designed to prevent others from stealing your money.
Easy To Tack
It is easy to track the performance of unit trusts as units are priced daily. This way you can be able to know exactly how your investment has grown or depreciated each day.
Unit Trusts Shortcomings
No Changes in Holdings
A notable shortcoming of unit trusts compared to things like Mutual Funds or Exchange Trade Fund has to do with the fact that its holdings are always fixed. Once a unit trust is formed, its holdings remain the same until the termination date.
While this is an advantage when holdings are performing well, losses can accrue fast in case the market is in a downtrend, and the termination date is far away. Things like Mutual funds are actively managed which means they trade in and out of holdings, depending on market cycle and performance of various assets.
Only One Way to Buy
Exchange traded funds and stocks can be bought in a myriad of ways from various brokerage firms. Unit trusts, on the other hand, can only be purchased directly from the issuer. The purchase price is thus not competitive.
New capital Inflows into a unit trust can dilute investor’s holdings significantly, in case a fund does not invest in new asset classes. In contrast, capital inflows into exchange-traded funds or mutual funds do not put current investors at a noticeable disadvantage.
The fact that Unit trusts are well regulated, transparent and easy to understand makes them ideal investment vehicles for gaining exposure to a vast array of financial instruments. Their benefits supersede shortcomings, seen as one of the reasons they are becoming popular as people look for avenues for reliable income.