Why are Singapore Unit Trusts sexy?

There are bucket loads of Investment options available to the retail investor in Singapore and it can be mind boggling to consume all that content and try to make a decision. An investment decision is hard to make as you are putting your money to double it or triple and not erode it.

Talking about Investments, we do believe that a portfolio should be diversified based on your risk appetite and the instruments of investment will depend on that. If your risk appetite is very low, then we would ask you to stick to traditional Interest based investments like bonds and fixed deposits. Although these kinds of Investments do not give you exceptional results, they do definitely not erode your capital and make you lose your capital.

The other spectrum is the investor who has a high-risk appetite, who will invest in stocks and derivatives. The kind of investor is looking to hit it big. There are other kinds of Investors who are neither too defensive nor too high risk; they focus on the value of a stock. The value investor like Warren Buffet focuses on acquiring great stocks and holding them for a long horizon period where they generate wealth.

We would like most of our Investors to be in the last category, because that is the right path for building wealth that focuses on fundamentals and that isn’t too risky. If you invest in companies that will make money for the foreseeable future, it’s highly likely that you will generate wealth.

Today we’ll delve into one kind of an Investment that will help every kind of Investor. Unit Trusts.

What are unit trusts?

Unit trusts Singapore are pooled investments from different investors into a fund that is managed by a portfolio manager. This fund may consist of stocks of diversified companies and from companies from other countries as well. Unit Trusts are known for great diversity because of the portfolio of stocks. This is also that is not direct, the skills of a fund manager are very important to this equation.

So for example if the value of a trust that you are investing in has a cost of S$53.65, then thousand units will cost you S$53,650. If the trust does well then the unit gains and you stand to make a capital gain.

Let’s delve into the positives and negatives of Unit trusts

Positives

a. Diversification

Unit Trusts give the option of diversity in just one single investment. Unit trusts comprise of different set of stocks that make the entire fund or a trust. This means that a unit trust can have a stock in the technology industry with stocks like Apple and Google and on the other hand can have stocks like Exxon Mobil and Petro china. When the oil stocks go down, the technology stocks will help maintain the level of the unit trust. If both the industries do well that means the units increase and you make greater gains.

b. The person behind the fund

This, in my opinion is the trump card of unit trusts. When it comes to unit trusts, you don’t invest in a particular stock, you invest in a person. Fund managers who have proven track records that you can compare other managers with and you could choose a fund manager that matches your style of investing. If you were sure about the person behind the trust, then you would get a person who would do well for your investments.

c. Better than you Investing

What a unit trust offers is freedom from getting in yourself. Investing in stocks is hard. Not everybody can pick stocks like Warren Buffet and commit to it to a long term horizon of 40 to 50 years. Stock picking is an art and science especially when it comes to long-term investing and in this case, you outsource the difficult aspect to somebody else who is a seasoned player in the stock market game. When somebody else picks stocks for you, then you are saving considerable amount of time as well.

Negatives

• Almost be average

The bad part about so much diversification is, the good and well performing stocks can be eaten away by the bad performing stocks and you are left with average returns. Most fund managers try to maximize for growth, but different industries behaving differently can produce opposite results. Similar to the example above, if oil stocks are doing well and technology stocks are plummeting, all the gains from the oil stocks are brought down by the technology stocks. In the end, you are left with averages.

b. Units can be expensive

There is a lot of demand for unit trusts and because of this reason they can be expensive. When a unit trust is expensive it means you need to invest a lot of money to see substantial returns. Some funds also have a minimum purchase price of S$1,000 which can be difficult for investors who want to test the waters, In most cases it’s like going all-in and see how the market performs. This factor is bad for new investors who start out with smaller investments compared to the seasoned investors.

• Management Fee

The fees are a big problem for unit trusts because there are many kinds. The different kinds of fees are subscription fees, redemption fees, switching fee, management fee, trustee fee and miscellaneous fee. The subscription fee is the price you pay when you invest into a fund; this is added to your cost. The redemption fee is when you make a sale. If you are at a loss, your loss increases, if you are at a profit, then your profit reduces. The management fee is the fee charged by the fund manager every year to manage the fund. The trustee fee is charged by the trustee to protect and maintain the fund. The miscellaneous fee comprises of fund audit fee etc. As you can see, the fees play a huge role and can increase the cost and eat away the profits from your investment or sale.

Overall we would say Unit Trusts are great investments that especially have different benefits compared to all other investments. For this reason, unit trusts are sexy!

Funds Singapore gives a great list of funds that are Unit Trusts that can be filtered based on certain parameters. Check it out and let us know in the comments about your unit trust experience!

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