Investing in Unit Trust
A unit trust (also known as a collective investment scheme) is a professionally managed
investment fund that pools money from investors. The money is invested in a portfolio of
assets to achieve the investment objectives of the unit trust. This portfolio of assets can
consists of a basket of stocks, fixed income securities or other financial assets or some
relating combinations. By aggregating the funds of a large number of small investors into
specific investments, individual investors will have the access to a wider range of securities
than the investors themselves are able to assess.
Unit trusts can be classified as open-ended or close-ended funds. Close-ended funds have a
fixed number of issued shares traded on an exchange and generally do not issue new shares
after the close of the subscription period. Open-ended funds are allowed to issue new units
and existing units can be realised or redeemed on demand. As there is no limit to the fund
size, the price of the units does not rise and fall in response to demand, but is dependent on
the value of the fund’s underlying assets.
As unit trusts are generally considered medium to long-term investments, investors should
ensure that they have the financial resources to stay invested in them for a reasonable
period of time so as to gain the full benefits.
Benefits of Investing in UTs
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Diversification: One of the largest advantages of investing in unit trust is the
diversification provided. By pooling investors’ money, companies enable
shareholders to hold fractional shares of many different securities. This diversified
portfolio of securities hence shield investors from large losses as a poor performance
of any one asset in the unit trust is not likely to have a major adverse impact on the
overall investment as a whole.
Small Capital Outlay & More Investment Opportunities: The initial investment outlay
can range from $1,000 to $5,000, which is an affordable amount to an individual
investor. Furthermore, unit trusts will allow investors to invest in a portfolio of
stocks and bonds with this amount, which would otherwise be outside the reach of
an average investor if not for the pooling of financial resources. Investors will also be
able to tap into overseas markets with less hassle.
Professional Management: Unit trusts are managed by professional fund managers
with expertise and experience in investments. They are hence prompt in reacting to
the investment environment and can manage their fund by responding accordingly
based on research and analytical tools.
Drawbacks of Investing in UTs
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Risks: Like any other investment, there is always an element of risk investing in unit
trusts. Although investing in unit trusts helps to diversify risks, it does not eliminate
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all risks entirely and there is still likely to be fluctuations in the market price of the
unit trusts.
Fees and Charges: Investors usually have to pay a one-time initial sales charge
(“front-end load”) when they buy a unit trust. There may be other costs such as
management fees, switching fees, and redemption fees.
No control over individual investments purchased by the fund: The fund manager will
be making the decision over what choice of bonds, shares, or other assets to go into
the fund.
Funds by Asset Classes
Money Market Funds
Hold short-term fixed income instruments such as treasury bills and commercial paper with
high credit quality, and generally have an average weighted maturity of no more than 30
days. They seek to limit exposure to losses due to credit, market, and liquidity risks and
strives to maintain a $1.00 per share net asset value. They are the lowest risk option on the
fixed income risk-reward spectrum and interest earnings are paid as dividends.
Short Duration Bond Funds
Short-term bond funds typically invest in bonds that mature in one to three years. The
limited amount of time until maturity means that interest rate risk is low compared to
intermediate-term and long-term bond funds. Short-term bond funds are generally
considered to be the next step up the ladder in terms of both risk and return potential.
Fixed Income Funds
Invest in fixed-income securities.
They can be subclassified according
to the specific types of bonds owned
(high-yield
or
junk
bonds,
investment-grade corporate bonds,
government bonds or municipal
bonds) or by the maturity of the
bonds held (short-, intermediate- or
long-term). Bond funds typically pay
periodic dividends that include
interest payments on the fund’s
underlying securities along with
periodic
realized
capital
appreciation.
Image 1. Fund performance of First State Bridge (Balanced Fund)
Source: Monthly Fund Factsheet 31 Jan 2013
Balanced Funds
A fund that combines a stock, bond, and sometimes money market component in a single
portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds
that reflects either a moderate (higher equity component) or conservative (higher fixedincome component) orientation. These funds are geared toward investors who are looking
for a mixture of safety, income and modest capital appreciation.
Equity Funds (Stock Funds)
Invest principally in stocks. The
objective of an equity fund is
long-term growth through
capital
gains,
although
historically dividends have also
been an important source of
total
return. Funds
which
involve some component of
stock picking are said to be
actively managed, whereas
index funds try as well as
possible to mirror specific stock
market indices are considered
to be passively managed.
Image 2. Fund performance of Aberdeen Pacific Equity Fund
Source: Monthly Fund Factsheet 31 Jan 2013
Specific equity funds may focus on a certain sector of the market or may be geared towards
a certain level of risk. Some funds may also invest solely in the securities from one country
or have a regional orientation while others may be globally invested. They may also focus on
some size of company (small-cap, large cap-, etc.) or have a specific style, such as value or
growth. Value fund invests in companies which are usually older, established business that
pay dividends whereas growth fund invests in the stock of companies that are growing
rapidly and has a tendency to reinvest most of their profits for research and development
rather than pay dividends.
Structured Product Funds
A fund that combines both equity and fixed-income products to provide investors with a
degree of both capital protection and capital appreciation. These funds use fixed-income
securities to give the fund capital protection through principal repayment along with the
added gain of interest payments. The fund uses options, futures and other derivatives,
which are often based on market indexes, to provide exposure to capital appreciation.
Alternative Investments Funds
Funds that invest in alternative investment, an investment product other than the
traditional investments of stocks, bonds, cash or real estate. The term alternative
investment is used relatively loose and includes tangible assets such as precious metals and
some financial assets such as commodities and financial derivatives.
Fees & Charges
Paid by the retail investor:
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Initial sales charge (“front end load”) – This fee is charged when the investor buy a
unit trust, and is typically 1.5% - 5% of the initial investment. Funds with an initial
sales charge would usually not charge a redemption fee.
Redemption or Realisation charge (“back end load”) – This fee is usually et at 1% - 5%
of the investment, and is charged whenever the investor sell or redeem the fund.
Funds that charge a redemption fee typically wound not have an initial sales charge.
Switching Fee – Some unit trusts allow investors to switch or change to another fund
managed by the same fund manager. A switching fee of about 1% would usually be
charged. There may also be free switching facilities available.
Paid by the unit trust:
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Management Fee – This is an annual fee charged by the fund manager for the
management of the fund. It is typically 0.5% - 2% per annum of the Net Asset Value
(NAV) of the fund.
Trustee Fee – This is the annual fee charged by the trustee for the provision of
custody services for the fund’s assets. It is usually set at 0.1 – 0.15% per annum of
the NAV of the fund.
Regular Savings Plan (RSP)
Some unit trusts may offer regular savings plans (RSP), a monthly subscription plan that
enable you to invest a fixed amount of money into a particular fund on a regular basis,
whereby a fixed sum of money is invested in the unit trust at regular intervals. RSP utilizes
the dollar cost averaging (DCA) concept of investing which is the practice of investing a fixed
amount of money regularly regardless of market conditions. In the case of RSP, the
investments take place monthly.
By investing regularly, more units are bought when prices are low and less units when prices
are high. As a result, in rising or fluctuating markets, the average cost for all the units can be
lower than the average price during the same period. This dollar-cost averaging strategy
allows investors to overcome the price volatility in the unit trust.
Many investors procrastinate in investing, preferring to accumulate a large sum of money
before deciding where to invest. The temptation of spending the sum meant for
investments could also derail longerterm financial goals. By deducting a
fixed sum of money from the bank
account and placing them into funds,
RSP also instils discipline in investing.
This helps investors steadily move
towards their financial goals.
Moreover, with investors now
starting young, many may not have
the luxury of investing a large lump
sum. RSP becomes a practical method
of "invest-as-you-earn". RSP is Image 3. Units purchased vs. Price using Dollar Cost Averaging
available for CPF-OA, CPF-SA, SRS and
Cash via GIRO.
Yvonne Chua
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