Costs of investing in Unit Trusts

Costs of investing in Unit Trusts

NAV TL;DR

If you don’t have time to read through the whole article, you can check out a summary below:

  • Unlike ETFs, Unit Trusts are actively managed funds, which can mean higher returns but also operating costs and higher fees
  • However, investors of Unit Trusts do not incur commission, clearing and trading fees when investing
  • Instead, they face front- and back-load fees like sales charges, as well as recurring ones like platform and management fees

Understanding the costs that come with financial instruments such as unit trusts, equities and Exchange-Traded Funds (ETFs) is crucial as they will impact the gains. Unit trusts like their ETF counterparts provide investors with diversified exposure to markets. However, they differ from ETFs in a number of ways.

Firstly, unit trusts are actively managed funds. This means a fund manager is continually looking at rebalancing the fund’s portfolio. The fund manager of a unit trust focuses on choosing which securities to buy and sell given the overall market outlook. This may result in higher-than-average returns but also leads to higher operating costs.

Furthermore, unit trusts are often traded on private markets and sold through distributors, making them less liquid asset than ETFs. Distribution fees are often charged to investors too.

Investors in unit trusts 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, front-load or entry fees are charged.

One-time fees

An example is the sales charge. This fee, charged by distributors, can range from zero to 5% of the total investment. The back-end load equivalent of a sales charge is called a redemption fee. This can range between 1% and 5% of an investment. Where front-loads are charged, back-end loads usually aren’t.

Another type of one-time fee incurred is a switching fee. This is charged when an investors switches from one fund to another under the same fund manager. These fees are paid to the distributor.

Those using a wrap account to invest in unit trusts also face specific one-time fees. Wrap accounts are investment portfolios managed by a financial firm for a recurring fee, which also provides advisory, brokerage and administrative services for investors. When investing monies through such an account, fees in the range of 2% to 3% per annum of the new funds invested are charged.

Recurring fees

On top of one-time fees, do look out for recurring payments when investing in a unit trust.

The first of these is called a platform fee. This is charged by the platform that an investor subscribes to a unit trust from. The cost ranges between zero and 3% of the total fund holdings on the platform. That said, platform fees have been falling in recent years and it is becoming more common to see platforms charging no such fees.

Similar to ETFs, management fees are also charged and are deducted from the return on investment at the end of each year. Do note that management fees for actively managed funds are generally higher than passively managed ones.

According to Morningstar Investment Research, the average traditional index fund has a management fee of 0.74%, higher than the average of 0.44% for ETFs. Other recurring fees that are payable include a trustee, custodian and administration fees.

In all, the total expense ratio (TER) that investors incur, which will be deducted from a unit trust’s yearly returns is between 1% and 2.5%. It will be disclosed in a unit trust’s prospectus or factsheet.

In addition, the recurring fees for wrap accounts are about 0.5% to 1% per annum of the total value of the investment. These can be charged quarterly or yearly.

Investing in Unit Trusts using CPF funds

Unit trusts can also be purchased using funds from an investor’s CPF Ordinary Account (OA) and Special Account.

When it comes to one-time fees, CPF Investment Scheme (CPFIS)-approved unit trusts can have sale charges (front-end load) of up to 1.5% of the value of the investment per transaction. That said, these costs will be removed from 1 October 2020, which should make them more attractive options to investors.

Switching fees are charged according to the rate the fund manager charges. However, investors who have purchased unit trusts through a wrap account of a CPFIS Investment Administrator do not face these fees.

Further upfront costs include agents charging up to $2.50 per 1,000 units, with maximum charge of $25 per transaction.

There are capped TERs for CPFIS-approved unit trusts. These recurring costs are as follows:

Risk categories

TER caps (% of NAV)

Higher risk 1.75
Medium to high risk 1.55
Low to medium risk 0.95
Lower risk 0.35

For unit trusts held in a wrap account with a CPFIS Investment Administrator, an annual fee is charged at a rate of 0.7% per year on the total market value of the investment. From 1 October 2020, this fee will be lowered to 0.4%.

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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.

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