A Comprehensive Guide to Unit Trusts in Singapore 2019
Singapore, as a leading investment hub in Asia, has many options in which investors can put their money. Inexperienced Singaporeans may be at a loss as to the best investment vehicle to deploy. Unlike their experienced counterparts who are familiar with a diverse range of assets, first-time investors have limited knowledge of the stock market.
Therefore, it is quite common to find these new investors seeking help from financial advisors. Such advisors will generally recommend investing in unit trusts, also referred to as mutual funds. Before you get lured into investing in unit trusts, it is rational to have a full understanding of this kind of investment. This article provides a comprehensive background to unit trusts.
The meaning of a unit trust
A unit trust is a fund that pools together investors money to invest in assets a fund manager believes can generate a return. They invest across some different assets like stocks and bonds among others.
The characteristics of a unit trust
Here are three major characteristics unit trusts exhibit.
1. Control by a fund manager
When you choose a unit trust, you essentially appoint a specific fund manager to control your investment. You can’t select the underlying assets in a fund as the fund manager manages the components of a unit trust. It is thus essential to consider who will be manning your investment to ascertain whether he or she is well qualified and experienced. Conduct research to understand the fund manager’s status.
A fund manager is responsible for making your returns. Thus, you must not only concentrate on choosing a unit trust but a fund manager as well. As many investors may lack expertise in the stock market, choosing a highly competent manager is important.
2. Unit trusts have a low risk
Unit trusts are well diversified; thus the risk of the investment is low. The fund manager buys shares from different companies. This essentially means that if one stock underperforms, the other shares that are well performing mitigate the risk.
For instance, if a fund focuses on the money market, it can invest in short-term debt instruments or banks’ fixed deposits among others. If fixed deposits perform poorly by providing shallow interests, the better performing debt instruments can compensate for the loss.
Nevertheless, an investor needs to find out what a unit trust invests in and not conclude that it is automatically diversifying broadly. It is not always the case. As an investor, you need to review what your fund will invest in. An ideal fund should diversify into these areas:
- Industries: The fund should look to touch various key sectors like the technology, hospitality and health care sectors.
- Asset classes: The fund should embrace a number of assets. For instance, it should have a mix of stocks, bonds, and commodities.
- Location: This refers to the geographical region a fund invests in. A unit trust could invest in some countries like developed nations, a single state or globally.
Therefore, consider a fund that diversifies well and more so in areas you are comfortable with.
3. Unit trusts incur fees
As noted earlier, the fund manager runs the unit trust, and this is not done for free. As these managers watch the stock market to establish assets with the best returns, they need compensation.
Here are the fees involved with the unit trusts.
- Initial service charge: When you buy a fund, you need to pay up to 5% of your investment.
- Redemption fee: This is the charge you pay when you sell your investment. The fees are usually up to 5% of the investment. Some funds won’t charge a redemption fee if you had to pay the initial service charge.
- Online transaction fees: If you decide to buy a fund online, you may pay about 1% of your investment.
- Switching fee: This charge applies when you choose to change a fund under the same manager. It is usually 1% of your new investment.
- Management fee: This is the fund manager’s salary, and it is often 1.5% to 2% of the Net Asset Value (NAV) per year.
Other additional charges that may apply include trustee fees, admin and audit fees. Thus, you need to evaluate if a fund is eating into your returns. Choose a unit of trust that leaves you with good returns.
Why many investors prefer unit trusts
In spite of the costs involved with the unit trusts funds, investors like them as a way to invest in the key markets. Unit trusts are a means of holding big stocks like Apple in the USA. Also, if you want to practice off-hands stock market investment, unit trusts serve you best. The fund manager takes the load off your shoulders.
Nevertheless, having a personal money manager and paying the premium does not guarantee good returns. It all depends on the unit trust you choose.
What to consider when choosing a unit trust
Conclusively, here is what to consider to pick the best unit trust.
- The fund house: This is the financial company or bank offering the fund. You will come across names like Aberdeen, BlackRock, and Franklin Templeton. Choose an issuer with an outstanding track record.
- Fund manager: You will encounter the names of fund managers in charge of the funds. Choose experience and expertise.
- Fund objective and investment strategy: A unit trust may cater to short-term growth, others, long-term growth: You may also find some that focus on passive income. Choose one in line with your personal financial objective.
- Unit trust’s holding and asset allocation: Do you want a trust that is widely diversified? Do you like the assets the fund invests in? A unit of trust should meet your preferences.
- History of performance: Research on past returns of an investment. This information is readily available on websites. Check out how often it pays dividends and what to expect.
- The unit price and minimum investment required: There is always a minimum amount to invest. Find out how much and the price per unit.
How well you choose a unit trust determines the returns you get. This means you will need to do a lot of groundwork before landing on your best unit trust. Don’t assume the fund manager will do this for you.
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