Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • Dow

    39,760.08
    +477.75 (+1.22%)
     
  • Nasdaq

    16,399.52
    +83.82 (+0.51%)
     
  • Bitcoin USD

    70,443.41
    +385.91 (+0.55%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,965.37
    +33.39 (+0.42%)
     
  • Gold

    2,218.90
    +6.20 (+0.28%)
     
  • Crude Oil

    81.96
    +0.61 (+0.75%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Nikkei

    40,168.07
    -594.66 (-1.46%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE Bursa Malaysia

    1,530.60
    -7.82 (-0.51%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

Understanding unit trusts: The pros and cons

By James Yeo

By definition, a unit trust is a fund that pools money from potential investors and invests in a variety of financial assets according to a prescribed investment goal and strategy.

Investing in unit trusts can be a good way to get a broad exposure to the market, especially for newbie investors. But before you do that, you need to understand the pros and cons associated with unit trusts.

Pros of unit trusts

1) A wide assortment of unit trusts First and foremost, we are spoiled for choice with the huge number of unit trusts available out there. According to the Fundsupermart website, they have over 1,000 unit trusts offered by more than 80 fund managers.

ADVERTISEMENT

This ubiquity makes it easy for investors to choose a fund that matches his or her risk tolerance and investment objectives.

Fundsupermart's fund selector tool.
Fundsupermart’s fund selector tool.

The screenshot above illustrates how easily you can select funds based on your own criteria. For example, an investor can opt for a global equity-focused unit trust in the healthcare sector or a balanced unit trust investing primarily in Singapore.

2) Professional Management
When you buy into a unit trust, you are actually choosing a professional money manager to invest your money. It is important to look at the track record of the fund’s performance over the long haul to see if its investment approach is good.

In addition, there are often retail investors who dread going through the detailed research of every investment. Therefore, they would probably opt for their money to be managed by experienced professionals with greater access to investment information and tools instead.

3) Diversification
You probably have heard it the word more than a couple of times – diversification. Buying unit trusts entails you the benefits of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. Here’s a simple example:

Aberdeen's Singapore Equity Fund.
Aberdeen’s Singapore Equity Fund.

The Aberdeen Singapore Equity fund invests in the Singapore blue chips like OCBC, DBS, ST Engineering, etc. The minimum investment amount is only S$1,000 and you get to be exposed to a mix of different investments in this unit trust.

If you were to ask me, this is a much better option to build a diversified portfolio right away as compared to buying the securities one by one.

That said, simply purchasing one fund might not provide you adequate diversification if the fund is sector or industry specific. For example, investing in an oil and energy unit trust might spread your money over thirty companies. However, being all correlated to the oil prices, your portfolio will likely suffer if the oil prices decline, like what has happened during the past two years.

Cons of unit trusts

Like there is no light without darkness, there is also the downside that comes with it. Here are 2 important drawbacks to take note below.

1) Costs
As previously mentioned, professional money managers would be the ones choosing the type of investments and grow your money. That said, the ‘administration’ of your portfolio doesn’t come free and there are usually several types of fees to be charged.

Management fee is the most common type of fee that is associated with this investment option. Unfortunately, most often than not, you will still have to fork out this money if your fund is performing poorly.

One should also be aware of any hidden fees and clarify with the consultant up-front before your investment.

2) Lack of control
In addition to the above point, you usually do not exercise any control over the investment decisions. While there may be quarterly investor calls and regular updates, you are practically at the whim of the team handling your money. As such, your best ‘bet’ would be to pick the right fund with a good money manager.

Conclusion

Investing in unit trusts is not straightforward and thus it is wise to do your homework before you plough your hard-earned money into unit trusts. On top of that, there are many types of unit trusts out there – with different investment strategies, risk levels and even geographical areas!

Thus, it is more important to understand your own investment profile and align your investment goals and approach with the funds you are investing in.