Investing in Unit Trusts: A Guide for Beginners

Would you rather a professional manage your investment funds? 

• Investments should suit the time frame of your goals and the level of risk that you are comfortable with. Remember that there is a trade-off: the lower the risk, the lower the likely long-term return.
• A unit trust, also known as a mutual fund, is an open-ended vehicle that allows investors to pool their money to purchase a number of securities and is managed by portfolio managers, who select the investments and allocate and distribute the investors’ money subject to their official mandate.
• Fund managers compete with funds in their category and make their money primarily from fees charged to the fund, i.e. to you, the investor. But it turns out that even the top-performing funds in their categories often actually fail to beat their benchmark indexes!

Unit Trusts

A unit trust, also known as a mutual fund, is an open-ended vehicle that allows investors to pool their money together to purchase a number of securities, such as shares, bonds and other financial products. 

These funds are managed by portfolio managers, who select the investments and allocate and distribute the investors’ money subject to their official mandates. You do not have a say in the portfolio manager's investment decisions, and the management will come at a fee (discussed later). 

How Unit Trusts Work

1. Investors’ money is pooled together into one fund
2. The unit trust’s fund manager invests this money into various assets to diversify the portfolio and increase its value
3. The unit trust’s total fund is split into equal units, which investors can buy and sell from the fund manager (usually at the end of the trading day)
4. Investors hold unit(s) and hope to profit in two main ways (explained below)
5. Investors can exit the fund by selling their units at the bid price

How Do Investors Make Money From Unit Trusts?

The potential returns generated by your investment will vary depending on the type of unit trust. But there are two main ways of generating returns:

• Capital appreciation - if the value of securities (e.g. shares) held in your fund overall has gained value and the price of the units is higher than what you originally invested.
• Dividends and interest - unit trusts can payout money earned in the form of dividends on stocks or interest (coupon payments) on bonds. Investors can either withdraw this or reinvest it back into the unit trust.

The funds are usually very liquid, meaning you can easily pull your money out if you wish to. Unit trusts make it easy for investors to diversify without needing a huge sum of money, making complex decisions, and dealing with paperwork. 

However, diversification is not guaranteed. For example, a unit trust may be solely invested in a particular industry, country or type of share. Some retail investors may feel that their portfolio has enough core holdings (e.g. blue-chip stocks or index funds). In that case, they may broaden their approach and invest in selected unit trusts to access assets, sectors or markets that may have been tricky to invest in independently. 

Unit trusts are not a low-risk investment, as your funds are not principal or capital guaranteed. 

Beware of total fees and expenses when purchasing unit trusts, as these will eat away at your potential returns. Most of the time, unit trusts are bought from the fund management company running them or from a bank/broker who will do so on your behalf, which means that you usually buy them with sales fees (unless explicitly "no-load"). 

Alternatively, you can purchase with a spread, where you buy at the "offer" price, which is usually at the NAV (net asset value, which represents a fund's per-share market value), and you sell at the "bid" price, which is (you guessed it) lower than the NAV. 

How to Invest in Unit Trusts?

Unit trusts are available directly from fund management companies (e.g. Schroders, Blackrock, UOB Asset Management and Fidelity) and fund distributor platforms (e.g. Fidelity again, FundSupermart and usually the investment division of your everyday bank).

Singaporeans can invest in unit trusts via the following methods: 

• Cash
• Supplementary Retirement Scheme (SRS)
• Central Provident Fund Investment Scheme (CPFIS)

You can find funds authorised or recognised by MAS for sale to retail investors here. ‘Authorised’ funds are Singapore-constituted, whereas foreign funds are ‘recognised’ funds.

WHAT ARE UNIT TRUSTS? COMPLETED. ✅

Sources:

1. https://www.moneysense.gov.sg/articles/2018/10/understanding-unit-trusts 
2. https://www.lloydsbank.com/wealth-management/what-are-mutual-funds.html 
3. https://www.ocbc.com/personal-banking/investments/unit-trusts/what-are-unit-trusts 
4. Cover photo from Pexels