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A beginner’s guide to unit trusts

If you’ve only got a minute,

  • A well-diversified investment portfolio can help investors weather the storms of the market.
  • Unit trusts are suitable investments for those who seek diversification with relatively little cash outlay.
  • In addition, unit trusts are usually included in professionally managed portfolios which offer flexibility, among others.

We’ve heard that a well-diversified investment portfolio can help investors weather the storms of the market. The reason behind this thinking is that by diversifying, investment risk can be managed without necessarily holding back potential investment returns.

That said, building an investment portfolio from scratch with securities (e.g. stocks and bonds) can be very tedious for the individual investor. It often requires time-consuming research and rigorous stock picking, which can be a hassle and not very suited to investors who are new or those who have busy schedules.

Today, there are numerous investment vehicles that pool monies from investors to invest in diversified portfolios, often for relatively small outlays while offering flexibility. Such pooled investment products, including unit trusts, continue to grow in popularity with retail investors for these reasons.

What are unit trusts?

Unit trusts are professionally managed investment funds that pool the financial resources of individual/corporate investors. These pooled resources are then invested in securities that fit a particular investment mandate.

The mandate can be viewed as a set of instructions for fund managers to cover geographical markets, industries, and asset types or even a combination of them to invest in.

Investors who invest in unit trusts are called unit-holders, and they hold the rights to the trust’s assets.

The first iteration of a fund with such a structure is said to date as far back as the 17th century. Meanwhile, the first modern unit trust, the MFS Massachusetts Investors' Trust, was launched in the US in 1924. It is still active today!

Types of unit trusts

In general, there are three main fund types for unit trusts:

Fixed income funds

These are unit trusts that invest primarily in bonds or fixed-income instruments.

For many, a fixed-income fund is a more efficient way of investing in bonds than buying individual bond securities which might have higher entry levels (i.e. higher cash required to make an investment). For instance, a corporate bond typically has a minimum investment amount of $250,000.

These funds are generally considered lower risk but with that comes comparatively lower risk returns to other fund types.

Balanced funds

Also known as multi-asset funds, these are unit trusts that contain both stocks and bonds. The investment objective for a balanced fund tends to be a mixture of growth and income.

As such, they are geared toward investors who are looking for a mixture of safety, income, and modest capital appreciation.

Equity funds

These invest principally in stocks.

As stocks are generally more risky investments with higher potential returns than bonds, a pure equity fund comes with a higher risk than fixed-income and balanced funds.

What to note when investing in unit trusts

To better understand unit trusts, here are 6 points to take note of.

1. Diversification

With unit trusts, investors can achieve diversification in an easier manner than if they had bought individuals securities. The latter would not be practical for a single investor, especially with limited financial resources. In fact, many unit trusts own more than 100 different stocks.

As a result, unit trusts provide investors with an excellent opportunity to invest their savings in a diversified portfolio of stocks or bonds – much cheaper than if you were to buy the assets individually.

2. Many options

Unit trusts tend to have a focus, and this can either be through an investment theme or based on geography.

For example, there are funds that invest in global or Asia equities, sectors like technology or consumer discretionary, fixed income assets like investment-grade and high-yield bonds, commodities like gold, or even Forex.

It is worth your while to do your homework and find one that suits your preferences.

3. Professionally managed

Unit trusts are funds managed by professionals. This means that unlike buying individual stocks, where you study the market to make informed choices, unit trusts are managed by full-time fund managers who do the research, selection, and portfolio adjustments for you.

Depending on the mandate, these professionals are continually looking at which securities to buy and sell given the overall market outlook as well as rebalancing the fund’s portfolio at regular intervals. This may result in higher-than-average returns but may lead to higher operating costs.

Unit trusts are regulated, which means they are required to publish information on past performance, comparison of performance to benchmarks, fees charged, and securities held.

4. Liquidity

Unit trusts are often traded on private markets and sold through distributors like bank. This makes them less liquid than other pooled investment products that are traded on exchanges like exchange-traded funds (ETFs).

That said, you are still able to withdraw your funds relatively quickly, usually by the end of the trading day or week.

On the whole, they are still considered very liquid investments.

5. Flexibility

While unit trusts are not bespoke investment solutions, they still give investors flexibility as there is no lock-in period. This means that you can cash out anytime if you wish to divert funds to other investment opportunities. But it is typically recommended that you invest over a substantial time in order to reap the benefits of investing such as time in the market to ride out volatility and compounding returns.

Moreover, it is also accessible to investors with different levels of affordability. They investors can choose to make lump sum investments or monthly investments through a regular savings plan.

6. Fees

As unit trusts are not listed on exchanges, investors do not incur commission, clearing and trading fees like they do when investing in other securities (shares, real estate investment trusts and ETFs).

That said, when purchasing unit trusts, investors should expect to be charged other fees such as front-load, entry fees as well as distribution fees.



This is the first article in our series on investing with unit trusts. If you’re keen to learn more about these funds, check out the other articles:

Part 2: Unit trust investment in Singapore

Part 3: Costs of investing in unit trusts

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

Disclaimer for Investment and Life Insurance Products

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