ABCs of Investing - What Fund Should You Invest In?

Buying a unit in a unit trust, means you buy into a pool of investments. A fund manager is appointed to monitor the pool and, over time, manage it as he sees fit. The price of the units will go up and down depending on the underlying value of the assets in the scheme.

So what are the advantages of unit trusts over buying directly into shares?

  1. You're well diversified across a range of investments. So any one investment performing poorly is not going to adversely impact your investment as a whole.

  2. Investors get the benefit a professional manager whose legal responsibility is to take care of your money.

  3. Access to asset classes that aren't otherwise easily accessible when investing directly.

  4. The manager will provide detailed reports of how the trust is doing and the reasons that it's been performing the way it has.


If you are buying into a unit trust for the first time, the basics still apply, as they do for any investment.

  • Remember, in general, the longer your investment time horizon, the bigger your ability to take risk.

  • If you are saving for retirement, the rule of 100 minus your age provides an indication of the proportion of risky assets that your portfolio can tolerate. So if you are 40 years old, around 60 per cent of your assets should be in the form of equities.

  • But every investor has different needs and you should obtain professional advice on what mix of assets best suits your needs.

Fees

  1. There is normally a front-end sales charge, most if not all of which is paid to the financial advisor selling the product. This charge is usually based on a percentage of the investment and can vary according to the complexity of the product.

  2. There is an annual management fee. This is paid to the fund manager, but a significant proportion will be passed on to the financial advisor.

  3. Fees paid to the trustee, the custodian and the fund auditor, as well as other out-of-pocket expenses such as printing, bank charges and GST.


Different Types Of Unit Trusts

  1. An investment linked product is really very simply a unit trust, but wrapped around it is a life insurance policy. These are commonly sold by life assurance companies. They act in the same way as a unit trust, but provide an insurance protection against events like death or critical illness.

    It's worth considering carefully whether this mixed bag is really what you want for your money. If you have no need for insurance coverage for your loved ones, be aware that your total expenses might be lower without it.

  2. Some unit trusts are invested in certain sectors like technology or healthcare. Others focus on stocks from a particular country or region.

  3. Some are even based overseas. These are called offshore unit trusts. These funds, coming from acclaimed financial centres, serve customers from around the world.

    Because they act on such a large scale, they often secure large cost savings. They can pass on these savings to the investor, making them a cheaper option than funds based here. Offshore funds are usually denominated in foreign currencies, typically $US. The currency of denomination is not as important as the currency of the assets in which the offshore fund invests.

  4. Two other types of fund help provide a degree of certainty that your investment won't be lost. Although, naturally, this means your returns are unlikely to be spectacular.
  • Capital Protected Funds
    Capital protected does not involve a single entity standing behind the capital protection and guaranteeing it. Therefore there is no guarantee. Instead capital protection is usually provided by a portfolio which will mature at the date of the capital protection. What's important is how secure are those bonds?

    You need to read the prospectus to see who is protecting your nest egg and how secure it is. You also need to check whether the capital is protected throughout the term or only at the maturity date. It's important to look at what is protected includes or excludes fees.

  • Capital Guaranteed Fund
    With a capital guaranteed fund, your capital is secured by a guarantee provided by a very sound financial institution. Usually a bank with a very high credit rating. So you can assume, that it is almost certain that your capital is going to be there at the time that the guarantee matures.

    But while funds will be protected to some degree in these products, investors should also realize that there is a catch ??'??a?'¨C the upside in capital guaranteed and capital protected funds, is limited.

Mistakes

  1. Not fully understanding if an investment linked policy will meet your objectives before you buy it.

    Insurance linked-products are convenient buys and seem like a good deal, but it is worth checking to see if you could do better.

  2. Backing out of a unit trust for the wrong reasons.
    Look at the performance of the funds relative to the performance of the market. That is the typical way the professionals compare the performance of fund managers - whether you outperform the market or whether you underperform the market.

  3. If your unit trust investment has lost money, it may not be the only one. Change your investment strategy only if the cards in your hand are fundamentally wrong.

  4. Overlooking fees.
    Unit trust fees are fairly standard and can be assessed using the total expense ratio. That's the total of all expenses against the value of the fund.

  5. Not fully understanding how a capital guaranteed or protected fund works before buying one. Investors should understand that while their funds are protected in these products to some degree, their upside is also limited.

    If your investment goal is just a short distance away, defend what you have and accept minimal gains. Take more risk the longer you have.

  6. Not considering offshore funds.
    Offshore funds based in centres such as Dublin or Luxembourg, are for sale to investors all over the world. The result would be a fund size with the scale and efficiency that can also benefit Singapore investors. You'll find that an offshore fund will usually have a lower total expense ratio than that of a Singapore domiciled fund.


Questions to Ask

  1. Do I need insurance coverage?
    If you don't, then stay clear of investment linked unit trusts because you'll be paying for a service you don't need. If insurance coverage is important, examine carefully the kind of policy you need. There's a good chance the best one to suit you will not be tied in with a unit trust.

  2. Should I bail out of my existing unit trust because it hasn't fared well?
    Look at its relative performance. Compare the results to what else was in the market over the same period. If it still looks weak, perhaps you should ditch it. If it performed comparatively well, it might be worth digging your heals in. Look at the underlying assets in the fund. Your assessment on their future performance is what should determine whether your stick or twist.

  3. Have I read the prospectus?
    Look for the total expense ratio. It will help you compare one fund's fees with another.
    Take note of any penalties that might be raised if you pull out of the trust before the date agreed in the contract.

  4. Does my capital need some form of protection?
    If it does, you can either take on specially designed unit trusts or simply adjust your asset allocation heavily in favour of bonds.

  5. Have I looked beyond Singapore?
    Foreign domiciled unit trusts often come cheaper, they provide a greater spread of industry sectors and increase your exposure to other more specific markets.