There are a few investment options such as stocks, real estate investment trust (REITs), exchange traded funds (ETFs) and unit trusts. In this article, we will take a closer look at the pros and cons of an unit trust. Unit Trusts are professionally managed funds. A Unit Trust invests a pool of money in a wide range of assets.
Types of Unit Trust
Unit Trusts invest in different assets such as stocks, bonds or a mix of both. They are diversified in different geographical markets and industry. Unit Trusts are classifed by geography, sector and type of assets held. Examples of fund house are BlackRock, Aberdeen and Fidelity. Examples of geography will consist of global, Europe, Asia, Japan and US. Examples of Fund Sector will be Energy, Healthcare and Technology.
Factors for Consideration
Investors need to invest in an unit trust with a good fund manager. How do we know whether the fund manager is acting to the best interest for the investors? Reputation of the fund manager and the unit trust company needs to be evaluated before you invest your hard earned money.
Another factor is the cost of investing in unit trust. An unit trust charges an upfront fee for initial investment and subsequent investment. This fee is charged by unit trust company to fund the day to day operation and agent’s commission. It means your fund are already making an immediate loss at the start of the investment. For example, say you are investing S$1,000 with a stock market fund, the trust company charges 5% upfront fee, your investment fund will be $950 only, you have made a 5% loss.
Besides the upfront fee, thee are management fee and trustee fees. The fees will be deducted from fund’s net asset value on a daily basis. These fees are listed in the prospectus.
Pros of investing in Unit Trust
Unit Trust is professionally managed by fund managers who have better access to information and tools. The fund managers are full time professionals dedicated to research and obtain alpha on their investment.
Unit Trust helps with risk management through diversified collection of assets.
Unit Trust is liquid in the sense that it can be redeemed daily.
Unit Trust requires very small amount of money to start with such S$100/month or minimum lump sum of S$1,000.
Cons of Unit Trusts
Exchange Traded Funds (ETFs) track a particular stock index. Unit trusts are actively managed and they try to beat the market. However, most unit trust fail to beat the market due to the high management fees.
Drawn to commission, be wary of agents that use performance tables, statistics, fund size, and some will promise that it is guaranteed return to close sales. You need to do your own homework on the unit trust, whether the agent invest in recommended unit trust and look at lowest upfront sale charges unit trust.
As mentioned before, the high cost of unit trust consist of initial service charge, redemption fee, switching fee, online sales fee, management fee, trustee fee, and other miscellaneous fees. All these charges will be paid by someone, guess who?
If you have no time to monitor your investment and believe in professional management, you can enlist the services of a trustworthy agent who has being around and act in the best interest of client to look at lowest upfront sale charges unit trust.
We have wrote an article on the fees and charges of Unit Trust here.