Introduction to unit trust April 23, 2024

Introduction to unit trust

In the diverse and complex world of investing, unit trusts stand out as a popular choice among investors, accounting for a significant share of the total investment capital. They offer a unique blend of diversification, professional management and accessibility.


What are unit trusts?

At their core, unit trusts are a form of investment where professional fund managers pool investors’ monies together to invest in a diversified portfolio of assets. A typical unit trust consists of a variety of bonds, stocks, and other types of securities.


Key terms associated with unit trusts:

  • Net Asset Value (NAV): Fund managers aggregate the value of all the different types of assets they have invested in and generate a Net Asset Value, or NAV, which signifies the value per unit of the fund. This provides investors with a convenient way to understand how their fund’s underlying assets fare.

  • Dividends: Many unit trusts distribute earnings to investors in the form of dividends, which can be a source of regular income. These distributions vary in frequency, from monthly to bi-annually and are calculated on a per-unit basis, contributing to the fund’s appeal as a passive income generator.

  • Investment strategy: Unit trusts employ various investment strategies to meet different investor goals and risk profiles. These strategies can range from fixed income and mixed assets to pure equity, with some funds also focusing on specific themes, such as environmental, social, and governance (ESG) criteria or technology advancements. Each strategy offers a unique approach to asset allocation and risk management, tailored to specific investment objectives.


Types of unit trusts and their investment focus

Equity Funds Invest primarily in stocks
Bond Funds Focus on investments in government or corporate bonds
Balanced Funds Combine stocks and bonds for a balanced approach
Index Funds Aim to replicate the performance of a specific market index
Specialised Funds Invest in specific sectors, regions, or themes


Advantages of investing in unit trusts

There are several advantages of investing in unit trusts, including the following:

Introduction to unit trust

  • Diversification
    A key benefit of investing in a unit trust is the ease of investors’ diversification of investment holdings without having to invest in each asset individually. This diversity ensures that the impact of poor performance in any single investment is minimised, as it’s offset by better performance in others within the fund.

  • Professional management
    One of the key advantages of unit trusts is the expertise brought by professional fund managers, who dedicate their time researching and strategising the optimum way to generate returns for investors. The success of a unit trust heavily relies on the acumen and performance of its management team. As such, the most effective strategies and superior performance metrics naturally draw a greater number of investors. This dynamic creates a strong incentive for fund managers to continuously innovate and excel in their investment approaches, ensuring their funds remain attractive and competitive in the bustling investment landscape.

  • Accessibility
    A significant advantage of unit trusts is their accessibility, primarily due to the low initial investment requirement. This affordability opens the door to diversified investment portfolios at a minimal cost, enabling investors to partake in a range of financial markets that might otherwise be challenging to access directly. The reduced financial barrier also empowers investors to adopt a consistent investment approach, contributing regular amounts to a fund and thereby leveraging the Dollar Cost Averaging (DCA) principle.

  • Understanding Dollar-cost Averaging (DCA)
    Dollar-cost Averaging reduces price risk when investors buy stocks, ETFs, and unit trusts. Rather than buying only at one price, it involves investing at regular intervals, regardless of the price. This approach is useful for those who do not have the time or expertise to time the market to invest at a low price.

  • Liquidity
    Most unit trusts come with daily dealing pricing, which means that investors typically do not have to worry about being unable to sell their funds. Buying and selling can easily be done on most platforms that offer unit trust as an investment option.


Understanding fees and charges when investing in unit trusts

Investing in unit trusts involves various fees and charges, essential for investors to understand before making an investment. These costs are typically outlined in the product highlight sheet for each fund. Here’s a breakdown of the common fees associated with unit trust investments:

Management fees The management fee covers the cost of operating the fund and the fund managers’ expertise in managing it. It covers the strategic allocation of assets, ongoing analysis, and decision-making processes that contribute to the fund’s performance.
Sales charges Sales charges are paid to the distributor (e.g., the platform on which you invest in the fund). These can be up to 5% of your investment amount.
Enjoy 0% sales charge when you trade unit trusts on POEMS.
Performance fee A performance fee is paid to the investment manager for generating returns above the benchmark.
Index Funds Aim to replicate the performance of a specific market index
Platform fee This fee is charged by the trading platform and can range from 0% – 3% of your holdings.
Enjoy 0% platform fee on POEMS.


Understanding the risks involved in unit trusts

Introduction to unit trust

Investing in unit trusts, like all investment vehicles, comes with its set of risks that could lead to fluctuations in the value of your investments. Below are some of the risks that investors might face:


Market risk Economic downturns, political instability, or global events like pandemics are all examples of events that could lead to potential investment losses.
Currency risk Fund managers invest across geographies and currencies. Hence, the weakening of an underlying currency relative to the investor’s currency can reduce the value of the investment when converted back.
Interest rate risk When interest rates rise, the value of bonds typically drops, and the opposite applies when interest rates drop. These can affect the NAV of funds exposed to bond and fixed-income instruments.
Managerial risk While fund managers strive to achieve the best possible performance, poor investment choices or strategies still occur. Researching the underlying fund manager’s track record and investment philosophy is important for investors to feel more at ease with parking their funds with a fund manager.


Conclusion

Unit trusts are a convenient and diversified way for investors to gain access to financial markets. They provide an avenue for individuals to partake in a broad range of investments backed by the expertise of professional fund managers. However, as with any investment, due diligence, a clear understanding of one’s financial goals, and an awareness of the associated costs and risks are paramount. For those looking to navigate the investment landscape, unit trusts offer a compelling starting point or addition to a well-rounded investment portfolio.

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Disclaimer

These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.

The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.

Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.

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IMPORTANT INFORMATION

This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  

 

Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
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Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com