Demystifying unit trusts

BUSTING 5 OF ITS COMMON MYTHS

You’ve often heard people mention about investing in funds, also known as unit trusts. But what are these, and would buying them mean your money is “stuck”? Read on to bust some myths about unit trusts.

A unit trust pools together investors’ money to invest in a variety of assets. These assets could be equities, government and corporate bonds, or commodities. There are many unit trusts out there with different focuses and risk levels, but they are all managed by a professional fund manager who studies the market to decide the investment strategy in line with the unit trust’s objectives.

IT’S HARD TO TELL HOW WELL A UNIT TRUST PERFORMS

Says who? Measuring the performance of a unit trust can be straightforward.

One way is to use a benchmark index, and see if the unit trust has outperformed or underperformed the index. It could be the Straits Times Index (Singapore), the Dow Jones Industrial Average (New York), the FTSE 100 (London), or any other index that is relevant to the unit trust.

You can also look at its annualised returns. That means looking at how the unit trust has performed over a period – say, 5 years - and taking the average. Use that rate to compare against other assets.

A UNIT TRUST UNDERPERFORMED THIS YEAR, DEFINITELY SOMETHING I SHOULD STAY AWAY FROM!

Not true. Don’t judge a book by a single chapter

Once-off events can be flukes. Like how you were distracted and didn’t study for that math exam – doesn’t necessarily mean you’re poor at math. The same analogy applies for unit trust. Look at its track record and you may want to consider giving it a go.

Again, bring your attention to its annualised returns to gauge its performance and potential. It may have done badly on some years – perhaps the economy wasn’t healthy – but it could have done well in others. Maybe the unit trust had a negative return last year, but looking at its annualised returns over a decade, it could have had 10% returns annually on average.

IF YOU BUY UNIT TRUSTS, YOUR MONEY WILL GET STUCK

Not at all, unit trust are flexible investments.

What you could be thinking of are bonds, which give higher returns if you hold them till maturity. The Singapore Savings Bonds, for example, mature after 10 years. Unit trusts, however, have no such characteristics. You can sell them at any time if you’re low on cash, and buy more when you have money to spare.

UNIT TRUSTS ARE RISKY

They may be less risky than picking your own stocks

Picking your own stocks requires a lot of effort and knowledge in market monitoring and research. Those are time-consuming activities. Unit trust, on the other hand, are handpicked for you by professionals who study the market very carefully.

Sure, unit trust come with their own risk and may be riskier than fixed deposits or bonds (such as the government-issued Singapore Savings Bonds). But they do one thing that fixed deposits and bonds may have a hard time doing: beating the inflation rate. Unit trusts typically have a higher return rate than fixed deposits and bonds, potentially protecting you from inflation.

There’s also diversification. Because each unit trust holds a portfolio of assets, it lowers your risk. You’re not putting all your money on just one horse – if one asset performs poorly, it isn’t going to completely ruin your financial plans.

UNIT TRUSTS ARE ALL THE SAME. JUST BUY ONE AND BE DONE WITH IT

Wait up – they’re not one and the same

While all unit trust hold a portfolio of assets, which can have domestic or international exposure (or both), each may be different in focus. Equity funds hold more stocks, bond funds generally consist more fixed income assets and others might zoom in on commodities or even money markets. Because of this difference in focus, unit trusts will have different risks and rewards.

Besides, investing is a highly personal journey and what works for your friend may not work for you. In fact, what might be a good investment strategy for you today could become inadequate for you in a few years’ time – say, if you were to get married, buy a house and have a child.

Always consult a financial planning specialist, or two, on which unit trust are most suitable for helping to meet your financial goals. Also, review your portfolio regularly – every six months or each time there’s a major change to your life – so it’s always in sync with you.

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