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:
- 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 Dollarost Averaging (DCA) principle. - 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. |
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
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 fund s 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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