5 myths and facts about Funds
Uncovering 5 common myths you’ve heard about Funds, which are also known as Unit Trusts.
Unit Trust Funds are a popular, yet sometimes misunderstood way to invest. It's not uncommon for Singaporeans to confuse Unit Trusts with other financial products, such as fixed income securities or stock trading. This confusion gives rise to certain myths, such as the idea that Unit Trusts leave your money "stuck" (true of some bonds, but not Unit Trusts), or that Unit Trusts have poor performance (their performance cannot be measured against products with fixed returns).
The truths behind these common myths
It's hard for regular investors to determine how well their Unit Trust performs
It's easy to check the performance of your Unit Trust Fund, compared to many other products
Unlike fixed income products such as bonds, Unit Trust do not provide a fixed return, such as a fixed three per cent or four per cent. Instead, Unit Trusts are measured against a benchmark index. Benchmark indexes include the Straits Times Index (Singapore) , FTSE 100 (London), the Dow Jones Industrial Average (New York), or an index that's most relevant to the fund.
By comparing a Unit Trust with a benchmark index and seeing if it has outperformed or underperformed the index growth, investors can easily get an up-to-date view of how well their Unit Trust is doing.
In addition, you can look at the annualised returns of the Unit Trust over a number of years. This helps you to measure its performance against other assets (see below).
A Unit Trust is "bad" because it under-performed this year.
Unit Trust performance is accurately measured over time, not by one-off events. To gauge the performance of a Unit Trust, you should look at its annualised (averaged-out) returns, over periods of at least five years.
A Unit Trust may have poor returns on some years, due to factors like economic downturns. For example, a Unit Trust may have provided a negative return last year; but when annualised over a period of 10 years, the same fund may have provided returns of ten per cent each year.
Always look at the track record of a fund. Avoid basing your decisions on a single year of good or bad performance.
Your money is "stuck" once you decide to put it in a Unit Trust
A Unit Trust is one of the most flexible investment options available. You can always sell your Unit Trusts if you need your cash back.
It's best to hold on to your Unit Trust for the long term, to get high annualised returns. However, we understand that emergencies happen. There are situations when you may need to get your cash back.
With Unit Trusts, there's no need to wait for a maturity period, as you would with an endowment plan or Fixed Deposit. There's also no penalty, such as losing the accrued interest, or getting only the surrender value*. You'll get whatever your units are worth, at the time you sell them.
Unit Trusts are risky.
Unit Trusts offer protection through diversification. The returns of Unit Trusts protect you from inflation-rate risk.
Unit Trusts may be riskier than assets such as Fixed Deposits, or investment grade bonds, but they still carry lower risks as compared to picking your own stocks, as the fund is managed by a full-time professional.
Most importantly, Unit Trusts offer diversification. When you invest in a Unit Trust, your money is spread out across different assets. The poor performance of a single asset won't derail your financial plans.
It's also important to consider inflation-rate risk. While investments such as Fixed Deposits or bonds may have an apparent lower risk, they have low returns. As such, they're quickly eroded by inflation.
Therefore, Unit Trusts should be used to complement defensive assets, such as simple cash savings, or Singapore Savings Bonds - they protect your wealth from inflation-rate risk, by growing faster than the cost of living can rise.
All Unit Trusts are the same. Just buy any random one, and forget about it
There's no such thing as "one-size-fits-all" when it comes to investing. Investing is a highly personal, ongoing journey.
Different Unit Trusts offer exposure to different types of assets. Some Unit Trusts focus more on stocks (equity funds), some on fixed income assets (bond funds), and some will emphasise commodities or even Forex.
It's important to consult with your wealth planning specialist on which type of fund best suits your financial goals. You must be comfortable with the risks and rewards of your Unit Trusts over the long term.
As your circumstances change over the years – such as by having a child or coming closer to retirement –your goals will also be altered. It's important to change the Unit Trusts in your portfolio to match your new situation. You should review such investments every six months, or after every major life change.