Mutual funds, or unit trusts as they are also commonly called in Singapore, are a common entry point for beginner investors, apart from Exchange Traded Funds (ETFs). Unit trusts, however, have gotten quite a lot of flak for their high fees, which eat into whatever returns they do generate.
But is this bad reputation justified? Let’s evaluate their pros and cons as an investment option.
What Are Unit Trusts?
A unit trust pools money from investors for the purposes of investing specific investment objectives and parameters. These could be a specific region, industry, or asset class.
This pool of money is managed by a fund manager, a financial professional who does the heavy lifting and analytical bits for you. The fund manager’s job is to use their expertise and research to maximise the fund’s returns, rebalancing to hedge against risks when necessary or to capitalise on opportunities when they arise.
When you invest in a unit trust, you take a back seat in handling your investments by entrusting your investments to a fund manager to actively manage it for you. Fund managers actively trade and attempt to get higher returns for investors.
Unit trusts are run by seasoned professionals who have a certain track record. The past performance of a unit trust can also be examined by looking at their prospectus before you decide to invest. This knowledge that their money is being managed by a financial professional who knows what they are doing makes unit trusts attractive for beginner investors.
Unit trusts offer a degree of diversification, compared to investing in a single company’s stock. Based on the fund’s mandate, a fund manager typically invests in a basket of investments, which helps mitigate your risks.
Another benefit of unit trusts is that it allows access to assets or markets that may not be available to the regular retail investor. These include special government bonds, very expensive equities, or stocks in certain foreign markets.
Investing in unit trusts typically incur higher fees than other investment instruments like Exchange Traded Funds, as you have to pay for the management, marketing, accounting and switching costs of the unit trust. The total of these costs add up to form the Total Expense Ratio (TER), which can cost upwards of 1.5 per cent of your total investment returns. This can add up considerably over the years, significantly reducing your real returns in the long run. These fees are payable, regardless of whether the fund makes or loses money.
In addition, when you invest in unit trusts, your capital is not guaranteed. In the event the fund does poorly, you may end up with less money than you started!
Another thing to consider is that you have no control over your investments. The fund manager handles the investments at their discretion, so long as the investment parameters of the fund is adhered to.
There is also no visibility on what the fund is invested in at any point in time. Reports of what the fund’s compoosition only occur at certain intervals, usually quarterly.
Should You Invest In Unit Trusts?
Past performance is not indicative of future performance. This is a pretty standard disclaimer, but it really cannot be emphasised enough.
There have been countless studies positing that over time, actively managed unit trusts are less likely to beat the market index, and that the variations in the unit trusts’ investment returns could be attributed to random chance.
Even unit trusts with very promising performance records may not do well in the coming year. Investing in unit trusts, like all other investments, is a matter of balancing your risks and returns.
It’s important to assess your own financial goals and your appetite for risk before looking to invest in unit trusts. Search for unit trusts that have a risk tolerance that matches yours, and align with your financial goals and objectives. Take the time to understand what your portfolio is made up of, and what you are investing in.
Lastly, take note of the mutual funds’ fees as you assess the profitability of the unit trusts you are looking to invest in compared to other investment tools available to you.
DollarsAndSense.sg aims to provide interesting, bite-sized and relevant financial articles.
Learn together with like-minded Singaporeans at the Personal Finance Discussion SG Facebook Group by discussing a range of personal finance topics.
If you have not done so, subscribe to our free e-newsletter to receive exclusive content not available anywhere else.