On this page, you won't find 5 reasons why investing in unit trusts is a bad idea. Neither would you find 3 reasons why you should. What you have here is a framework to think about unit trusts and references to resources that will be helpful.
My experience tells me most people know what unit trusts are. But for those who need to pick up the basics, please scroll to the bottom and you can find relevant links there.
Let's get started...
If you are reading this, it is most likely that you are clueless about investing. But imagine this. Imagine you are a boss (think of your boss) and you will like to hire a minion to do the work for you.
But then remember, you are ignorant about investing. How then do you distinguish between someone who talks a good talk and someone who can deliver? Quite simply, you just choose a person who has already delivered the goods!
So for those who choose to be consciously ignorant, then you have to write the rules of the game in your favour. And the parameters that favour you are as follow:
i) Choose only fund managers with a long track record and
ii) who has demonstrated that they have achieved higher returns than the stock market across time,
iii) and after subtracting fees, you achieve returns better than the average stock market return (i.e. 6% p.a +/-)
Stick with the tried and tested...
There are 3 key parts here - i) track record, ii) performance across time, iii) fees.
We are concerned not with short term performance but performance across time, since short term performance could be temporary. Info on the track record can easily be found in the fund factsheet, on fundsupermart.com or on citywire.com.
Just make sure that the fund manager was the same person who ran the fund for the past # of years in which the track record was generated. If you are not sure, just email the contact person. If you can't get the answer, then just avoid it. I don't have the figures but the universe of funds with the track record of 5 - 10 years of outperformance and achieved by the same fund manager who is still there is incredibly small. So, limited work you have to do there.
Separately, we are concerned about fees. The only way to minimize fees is to avoid over-trading (i.e. buying and selling the unit trusts) and with time, the drag from the one-off fees (sales/redemption charges) will diminish. There is still the on-going cost which you can't run away from. Think of it like the salary for that Harvard MBA minion you just hired.
Keep it simple...
Frankly, that's all you need. You may be told that you should diversify into different asset classes, different geographies, styles, etc. But if you are consciously ignorant, then what makes you think you can make a conscious well-thought through decision on which investing style is better or which geography is better? And if you can't, then the best you can do is find someone who has proven to be good, put your $ with him, and ignore the investing trends/flavours of the day.
There is a cost to ignorance and it is quite evident here in the world of investing. If you don't want to pay for the Ferrari that your Harvard MBA minion is driving, then you have to learn how to do it yourself. Only with knowledge, can you protect yourself and minimize costs. But without knowledge, the best anyone can do is outsource. And the formula is simple - find someone good and stick with him/her.
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Here's a comprehensive read on unit trusts - download here
Let me broadly summarize the essentials of the above document.
- Most SG unit trusts are open-ended funds and they tend to trade at their net asset value. Net asset value (NAV) is essential the value of all assets in the fund, less all liabilities.
- There are one-off costs and ongoing costs.
- One off costs include sales charge (upon purchase) and redemption charge (upon sale) and are usually 1.5 - 5%. Typically, a consumer is only charged either a sale or redemption charge but not both. This cost is typically priced into the product already, so you won't really 'see' it but it is there (see pg 12 -14 of the document)
- Ongoing costs include mangement fee (typically 0.5 - 2% of NAV) and trustee fee (0.1 - 0.15% of NAV)
- Capital protected funds do not guarantee that you receive 100% of your capital back; only capital guaranteed funds do
Here's a glossary of terms that you might need - go here
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