Unit trusts can be an excellent way to grow your wealth while keeping risks in check, but where do you even begin?
When I first started investing, I had no idea how important it was to diversify or how to select the right unit trust.
That’s why I’m here to break it down for you in a way that’s simple and relatable.
In this post, you’ll learn:
- What unit trusts are and how they work
- Why they can be a smart choice for your portfolio
- How to select the right unit trust for your goals
- Where to buy unit trusts in Singapore
If you’re ready to start your investment journey or just want a better understanding of unit trusts, keep reading!
What is a unit trust?
A unit trust, also known as a mutual fund, is a type of collective investment scheme that pools money from many individual investors like you – just like how an exchange-traded fund works.
By combining these contributions, the fund becomes large enough to invest in a wide variety of securities, including stocks, bonds, and sometimes other financial instruments.
This gives you access to a broader range of investments than you might be able to achieve on your own.
Why invest through unit trusts?
Diversification
Imagine trying to build a portfolio of individual stocks and bonds on your own – it’s not only time-consuming, but it can also be quite expensive.
You’d need a significant amount of capital to buy shares in various companies or invest in different asset classes like bonds and equities.
However, with a unit trust, you gain exposure to a broad range of investments without needing a large amount of money upfront.
By pooling your money with other investors, you can spread your risk across these different investments, reducing the impact of any single underperforming asset.
If one stock or bond dips in value, others in the portfolio might help cushion the blow.
Affordable as compared to individually diversifying through stocks
If you try to replicate a diversified portfolio on your own by buying individual stocks or bonds, you’ll likely face high brokerage fees, especially if you’re making frequent trades.
These fees can add up significantly over time, particularly when you need to rebalance your portfolio to maintain your target asset allocation.
Rebalancing on your own means repeatedly buying and selling, each time incurring additional brokerage costs.
With a unit trust, these fees are managed for you.
Since the fund manager takes care of the buying, selling, and rebalancing, you avoid the frequent costs that come with DIY investing.
This makes unit trusts more affordable in the long run, while also saving you the effort of managing the portfolio yourself.
You can enjoy diversification and periodic rebalancing without the added hassle and expenses.
In uncertain periods and inefficient markets, unit trusts tend to perform better
Unit trusts are managed by professional fund managers who constantly monitor the markets and make informed decisions.
They adjust the portfolio’s holdings based on changing market conditions, aiming to reduce risk and capitalise on opportunities as they arise.
For individual investors like yourself, trying to predict market movements or time the market can be challenging – if not impossible.
However, experienced fund managers are equipped with tools, data, and market insights to respond quickly to economic shifts, interest rate changes, or market downturns.
This ability to adapt means unit trusts can help mitigate some of the risks of market volatility, potentially offering a more stable investment journey.
Additionally, in inefficient markets – where prices don’t reflect all available information or where certain stocks or sectors are overlooked by individual investors – fund managers can identify hidden opportunities.
Low barrier to entry
Unlike certain investments, such as property or individual stocks, which often require a large lump sum, unit trusts allow you to start with a relatively modest amount of money.
For instance, many unit trusts in Singapore have minimum investments starting as low as $100 to $1,000, depending on the fund.
This affordability means that you don’t need to wait until you’ve saved up a huge amount of capital before getting started.
Moreover, some unit trusts allow for regular savings plans, where you can invest small amounts on a monthly basis.
This allows you to dollar-cost average, which means you’re buying more units when prices are lower and fewer when prices are higher, helping to smooth out the price fluctuations over time.
A wide variety of unit trusts are available
When it comes to unit trusts, you’re not limited to a single option.
In fact, there’s a wide variety of unit trusts available, each with its own investment strategy and focus.
This means you can choose a fund that aligns with your investment goals, risk tolerance, and financial situation.
Some funds even offer a balanced approach, combining both stocks and bonds to give you a mix of growth and income potential.
There are also unit trusts that focus on specific sectors, such as technology, healthcare, or real estate, or those that invest in certain geographical regions like Asia, Europe, or emerging markets.
This variety allows you to tailor your investment to suit your personal preferences and market outlook.
What are the different types of unit trusts?
Equity funds
Equity funds are unit trusts that primarily invest in stocks.
These funds aim for capital growth, making them a good option if you’re looking for potentially higher returns over the long term.
However, they do come with higher risk compared to other types of unit trusts, as the value of equities can fluctuate more significantly due to market conditions.
For example, equity funds might focus on specific regions, like Asia or global markets, or sectors, such as technology or healthcare.
This makes them ideal if you’re targeting a particular investment theme or want exposure to high-growth areas of the market.
But remember, with higher returns comes higher risk, so it’s important to consider whether this aligns with your risk tolerance.
Index funds
If you’re after a more passive investment strategy, index funds might be your go-to.
These unit trusts aim to replicate the performance of a specific market index, such as the Straits Times Index (STI) or the S&P 500.
Rather than trying to outperform the market, these funds simply mirror the holdings of the chosen index, which often results in lower fees since less active management is involved.
Index funds are great for those who want broad market exposure and prefer a hands-off approach to investing.
They’re also known for their lower costs as they require lesser management, which can lead to better long-term returns, especially when factoring in fees.
But if you’re looking to invest in an index, then you’re better off investing via an ETF.
Bond funds
Bond funds focus on investing in bonds and other debt securities.
These funds aim to provide investors with a steady income stream, making them an attractive option for those looking for lower-risk investments.
While bond funds typically offer lower returns compared to equity funds, they’re considered more stable and less volatile, particularly during market downturns.
You’ll often find bond funds that invest in different types of bonds, such as government bonds, corporate bonds, or a mix of both.
Some might focus on investment-grade bonds, which are issued by highly-rated entities and considered safer, while others might include high-yield bonds, which come with higher risk but also offer higher returns.
Fixed-income funds
Fixed-income funds are unit trusts that focus on generating a steady income by investing in bonds and other fixed-income securities.
These funds are typically less volatile than equity funds, making them suitable for more conservative investors who prioritise stability over high returns.
Fixed-income funds can include a variety of bond types, such as government bonds, corporate bonds, REITs, and dividend-paying stocks.
The aim is to provide investors with regular interest payments and capital preservation, making these funds a popular choice for retirees or those looking for reliable income streams.
While the returns might not be as high as equity funds, fixed-income funds are ideal if you’re looking for more predictable returns without exposing yourself to the significant ups and downs of the stock market.
Money market funds
Money market funds are considered one of the most conservative types of unit trusts.
These funds invest in short-term, low-risk securities, such as government treasury bills, certificates of deposit, and commercial paper.
The focus is primarily on capital preservation while providing modest returns.
Money market funds aim to offer high liquidity and minimal risk, making them suitable if you need easy access to your cash while earning slightly more interest than you would in a standard savings account.
They’re often used by investors who are looking for a safe place to park their money for the short term, especially during periods of market volatility or economic uncertainty.
While the returns from money market funds are typically lower than those of equity or bond funds, they provide a safe haven for your investments when you want to minimise risk or maintain a liquid position.
Growth funds
Growth funds are unit trusts that focus on capital appreciation by investing primarily in companies with strong potential for future growth.
These are usually stocks of companies expected to grow faster than the market, often in sectors like technology, healthcare, or emerging markets.
The main goal of growth funds is to increase the value of your investment over time rather than providing regular income.
These funds tend to reinvest profits rather than pay out dividends, which means you could see significant gains over the long term, especially if the companies in the portfolio perform well.
However, with this potential for higher returns comes higher risk.
Growth stocks can be more volatile, especially in uncertain market conditions, so you should be prepared for fluctuations in the value of your investment.
Balanced funds
Balanced funds offer a mix of both equities and bonds, aiming to strike a balance between capital growth and income generation.
These funds are designed to provide a more stable investment by diversifying between higher-risk stocks and lower-risk bonds.
The idea is to give you the best of both worlds: the potential for growth from equities and the steady income and stability from bonds.
These funds are often used by investors who want a moderate-risk portfolio that can weather market volatility better than an all-stock portfolio while still providing decent returns.
Geography-specific funds
Geography-specific funds are unit trusts that focus their investments on a particular country or region.
These funds allow you to invest in economic growth and opportunities within a specific geographic area, such as Asia, Europe, or emerging markets.
Investing in geography-specific funds gives you exposure to the unique opportunities and risks tied to that region.
For instance, a fund focusing on emerging markets could offer high growth potential but also have higher volatility due to political or economic instability.
Conversely, funds investing in developed markets may provide more stability but potentially lower growth.
Sector-specific funds
Sector-specific funds invest in companies within a particular industry or sector.
Whether you’re interested in technology, healthcare, energy, or real estate, there are funds designed to give you targeted exposure to these areas.
These funds allow you to focus on specific sectors you believe will perform well, or that align with your personal values or interests.
The advantage of sector-specific funds is that they allow you to bet on industries you think have strong growth potential.
However, they also come with the risk of less diversification, since the fund is concentrated in a single sector.
If that sector performs poorly, the entire fund could see significant losses.
Alternative funds
Alternative funds are unit trusts that invest in non-traditional assets, offering exposure to investments beyond standard stocks, bonds, or cash.
These assets might include real estate, commodities (such as gold or oil), private equity, hedge funds, or even infrastructure projects.
The idea behind alternative funds is to provide diversification and potential returns that are not closely correlated with the traditional financial markets.
One of the main benefits of alternative funds is that they can help reduce overall portfolio risk, especially during periods of market volatility.
Since alternative assets often behave differently from traditional stocks and bonds, they can provide stability when other parts of the market are underperforming.
However, these funds are more complex and may have higher fees and liquidity constraints.
For example, some alternative assets like real estate or private equity may take longer to sell, making it harder to access your money quickly.
That said, for investors looking for diversification and willing to take on more complexity, alternative funds can be a useful addition to a broader investment strategy.
Disadvantages to unit trusts
Lack of control
When you invest in a unit trust, you’re handing over the day-to-day control of your money to a fund manager.
This means you don’t get to choose the specific stocks, bonds, or other assets that the fund invests in.
Instead, you rely on the professional judgment of the fund manager to make these decisions.
While this can be a benefit if you’re not confident managing your investments, it also means you have little say in how your money is being invested.
Inability to effectively beat benchmarks
Many unit trusts struggle to consistently outperform their benchmark indexes over the long term.
While the goal of actively managed unit trusts is to generate better returns than the market, the reality is that only a small percentage of fund managers succeed in doing so regularly.
Even when they do outperform, it can be difficult to sustain that performance year after year.
This is particularly important if you’re comparing unit trusts to passively managed funds like ETFs, which simply track a benchmark (such as the Straits Times Index or S&P 500).
Active management makes it more expensive than ETFs
Fund managers and their teams actively research and make decisions on buying or selling assets, which leads to higher management fees and other costs, like sales charges and performance fees.
In comparison, ETFs, which are typically passively managed, have much lower fees because they aim to simply replicate the performance of an index rather than beat it.
For instance, while unit trusts may charge management fees ranging from 1% to 2% or more annually, ETFs usually have fees well below 1%.
Over time, these costs can eat into your returns, making unit trusts a more expensive option.
So, while unit trusts offer professional management and the potential for tailored investment strategies, they often come with higher fees and may not always justify the additional cost, particularly when compared to low-cost alternatives like ETFs.
What factors should I consider when selecting a unit trust to invest in?
Investment objective
Before anything else, it’s important to clearly understand the investment objective of the unit trust you’re considering.
Different funds have different goals – some aim for capital growth, while others focus on income generation or capital preservation.
If you want to grow your wealth over a long period, a growth-oriented equity fund might be suitable.
If you prefer steady income, you might lean towards bond funds or income-focused trusts.
Ensuring that the fund’s objective aligns with your financial goals is crucial to long-term satisfaction with your investment.
Risk profile
Every unit trust comes with its level of risk, which depends on the types of assets the fund invests in.
If you’re comfortable with higher risk for the potential of higher returns, equity funds, which tend to be more volatile, could be the right choice.
On the other hand, if you have a more conservative risk tolerance, bond funds or money market funds may offer more stability.
Think about your risk tolerance and the time horizon for your investment.
How much volatility can you handle?
How soon might you need access to your money?
If you’re nearing retirement or have a shorter investment horizon, you might want to prioritise funds that focus on capital preservation or provide regular income.
Historical performance
While past performance is not always indicative of future results, looking at a fund’s historical performance can give you insight into how it has performed over different market conditions.
You should check how the fund has performed in both bull and bear markets to see if it has consistently met its investment objectives.
Be cautious of funds with exceptional short-term performance – sometimes, this can be due to taking on higher risks or benefiting from market conditions that may not last.
It’s often more useful to examine the fund’s performance over a longer period, such as 5 to 10 years, to gauge how well it is managed through various market cycles.
Fund manager’s track record
The success of a unit trust often depends on the experience and skill of the fund manager.
A fund manager’s job is to make the day-to-day decisions about what to buy, hold, or sell, so their track record is a critical factor to consider when selecting a unit trust.
Look into the fund manager’s past performance with other funds and how long they’ve been managing the current fund.
Consistency in achieving or exceeding the fund’s investment objectives over time is a positive sign.
You may also want to assess how they managed the funds during different market conditions.
A good fund manager is someone who has shown resilience in downturns and a steady hand during market booms.
Fees and charges
Fees and charges can significantly impact your overall returns, so it’s essential to understand the costs associated with any unit trust you’re considering.
Lower-cost options, such as ETFs, often have management fees well below 1%, but actively managed unit trusts come with higher fees due to the active management involved.
Fund size
Larger funds have the advantage of economies of scale, meaning they can spread their costs over a larger pool of assets, which may result in lower costs for investors like you.
However, a very large fund can sometimes face challenges in being nimble, especially when investing in smaller or less liquid markets.
For example, if the fund becomes too large, it may struggle to quickly buy or sell positions without affecting the market price of the assets.
This can sometimes lead to diminished returns or inefficiencies, particularly in sectors or markets with limited trading volume.
On the flip side, smaller funds might offer more flexibility but could have higher fees because they don’t benefit from the same scale.
Asset allocation
This refers to how the fund distributes its investments across various asset classes, such as stocks, bonds, real estate, or commodities.
A well-diversified unit trust will allocate its investments across a broad range of assets to manage risk and improve the likelihood of steady returns.
Geographic exposure
When selecting a unit trust, consider its geographic exposure – the regions or countries where the fund invests.
Different geographic markets can carry different risks and opportunities, so it’s essential to understand where your money is being invested.
Some unit trusts also offer global exposure, allowing you to diversify across multiple regions, which can help mitigate the risks associated with investing in a single market.
Ask yourself: Where do you want your investments concentrated?
Are you looking to capitalise on the growth of Asian economies, or are you more comfortable with the stability of mature markets?
Your answer should guide your decision on geographic exposure.
Sector exposure
This refers to the industries or sectors in which the fund’s assets are concentrated, such as technology, healthcare, energy, or financial services.
Sector exposure can greatly influence the performance of the fund, as different sectors tend to perform better or worse depending on market conditions.
When selecting a unit trust, consider which sectors align with your investment goals and risk appetite.
Diversifying across multiple sectors can help spread risk, but if you are strongly convinced about a particular industry, you might prefer a fund with more concentrated sector exposure.
What fees and charges to take note of when investing in unit trusts?
Investments in lucrative market instruments require timely and efficient management.
The management of the funds is the responsibility of fund managers managing the funds and financial advisors who determine your investment objectives and investment strategy.
This is done by selecting asset classes that are profitable for you and give you maximum returns based on your risk profile.
However, nothing in the world is free, and neither are the services of a financial manager.
Since they procure a valuable investment portfolio for you and your investments, the types of fees generated may differ from unit trust to unit trust.
| Type of Fee | When you will incur | How much you will pay |
| Fund manager fees | Yearly | Usually 0.5% of invested funds |
| Sales charge/ Service charge | Every time you buy | 0.5% to 5% of the transaction |
| Redemption fee | Every time you sell (if there’s no sales charge) | 0.5% to 5% of the transaction |
| Switching fee | If you change funds | Usually 1% of the transaction |
| Brokerage fees | Yearly | Varies |
| Management fees | If you engage a financial advisor | 0.5% to 2% of net asset value |
| Trustee fees | As long as you are investing | 0.1% to 0.2% of net asset value |
| Miscellaneous fees | Depends | Depends |
Take note that for most unit trusts, the fees you pay are already considered in its returns – this means you don’t have to deduct fees from the returns you see.
The only time I see where this is not the case is in an insurer’s unit trust, where the returns shown are not included.
But to be safe, any time you’re looking at a unit trust factsheet, check the fine print if the fees are already included in the overall returns shown.
This will save you from unexpected surprises in the long-run.
How do I start creating my unit trust portfolio?
Understand your financial goals
Before diving into any investment, it’s essential to have a clear understanding of your financial goals.
Are you looking for long-term growth, or are you aiming to generate a steady income?
Your financial goals will determine the type of unit trusts that best suit your needs.
Ask yourself questions like:
- What is my investment timeframe? Are I looking to invest for 5, 10, or even 20 years?
- Do I need regular income? Or am I more focused on growing my capital for a future goal?
A clear vision of your goals will guide your selection of unit trusts and help ensure your portfolio aligns with your financial ambitions.
Determine your risk tolerance
Your risk tolerance is how comfortable you are with the ups and downs that come with investing.
Some people can handle the volatility of the stock market, while others prefer a more stable and predictable return, even if it means lower gains.
It’s crucial to understand your risk tolerance because this will help determine which types of unit trusts are suitable for your portfolio.
For instance, if you have a high risk tolerance, you might be comfortable investing in equity funds that have higher potential returns but also more volatility.
On the other hand, if you’re risk-averse, you may prefer bond funds or balanced funds, which aim to provide more stability and regular income.
You can assess your risk tolerance by considering:
- How would you feel if your portfolio dropped in value by 10%, 20%, or even more?
- Do you need quick access to your money, or can you let it ride through market fluctuations?
Find out what’s your ideal portfolio allocation
This refers to how you’ll divide your investments across different types of unit trusts to create a balanced portfolio that aligns with your goals and risk appetite.
A typical portfolio includes a mix of equity, bond, and possibly money market funds, depending on your personal situation.
The idea is to find the right blend of investments that match your needs while managing risk effectively.
Or go through our beginner investor course
If you’re new to investing and want to take a more structured approach, our beginner investor course is the perfect place to start.
It covers everything a beginner needs to know, essentially summarising what we’ve gone over in this section so far, but in much greater detail.
Here’s what the course offers:
- Understanding the Basics: We’ll walk you through the fundamentals of investing, how to set clear financial goals, and how to assess your risk tolerance. This ensures that you have a solid foundation before you start building your portfolio.
- Portfolio Rebalancing: This ensures that your asset allocation stays aligned with your goals, whether that means shifting between equity and bond funds or adjusting your geographic or sector exposure.
- Platform Recommendations: You’ll learn how to select the best platform that matches your investment needs.
- Long-Term Management: Whether it’s reviewing your portfolio annually, handling market downturns, or staying updated with your investment platforms, we’ll help you navigate the ongoing process of being a successful investor.
Where to purchase unit trusts in Singapore?
Online brokerages
Online brokerages offer a convenient and cost-effective way to purchase unit trusts.
Platforms like POEMS, FSMOne, and DBS Vickers allow you to buy and sell unit trusts directly from your online account.
The advantage of using online brokerages is that they often have lower fees compared to traditional financial institutions, and you can access a wide range of funds from different providers.
You’ll also have greater control over your investments, as you can research and select unit trusts on your own.
Most platforms provide tools for comparing funds, reviewing past performance, and assessing fees, making it easier for you to make informed decisions.
Robo advisors
If you’re looking for a more automated and hands-off approach, robo advisors like Syfe and Endowus offer a streamlined way to invest in unit trusts.
Robo advisors use algorithms to create a diversified portfolio for you based on your risk tolerance and financial goals.
They then manage your investments automatically, rebalancing your portfolio when necessary to keep it aligned with your objectives.
Financial advisors
Those who prefer a more personalised service can purchase unit trusts through licensed financial advisors.
Financial advisors will assess your financial situation, risk tolerance, and goals before recommending suitable unit trusts for your portfolio.
While financial advisors offer valuable expertise, they generally come with higher fees, including sales charges and management fees.
However, if you prefer having someone manage your investments and provide ongoing advice, this may be the best route for you.
If this sounds like it’s for you, we partner with unbiased financial advisors who can help you with your investing journey.
Frequently Asked Questions
Do unit trusts pay dividends?
Yes, unit trusts can pay dividends, but it depends on the specific type of fund.
Some unit trusts are designed to provide regular dividend payouts to investors, typically from income generated by the underlying assets, such as dividend-paying stocks or interest from bonds.
However, not all unit trusts offer dividends.
Some reinvest the income back into the fund to grow its capital, so it’s important to check its dividend policy before investing.
Can I invest in unit trusts that are set up overseas?
Yes, you can invest in unit trusts that are set up overseas.
Many unit trusts in Singapore offer access to international markets and funds based in other countries.
These are known as foreign or recognised funds, and they allow you to diversify your investments globally.
However, it’s important to consider factors such as foreign exchange risk, local market conditions, and the regulatory framework of the country where the fund is domiciled.
Always ensure the unit trust is authorised for sale in Singapore before investing in it.
What happens if I change my mind after I have bought a unit trust?
If you change your mind after buying a unit trust, most funds offer a cooling-off period, typically 7 calendar days from the date of purchase.
During this period, you can cancel your investment and get a refund of your initial investment.
However, the refund may be adjusted for any change in the fund’s market value during that time.
It’s important to note that this cooling-off period applies only to first-time purchases and not to additional investments.
Be sure to check with the fund provider for their specific cancellation policy.
Conclusion
Investing in unit trusts can be a smart way to grow your wealth while managing risk through diversification and professional management.
We’ve covered the basics of unit trusts, why they might be a good fit for your portfolio, and the different types available, from equity to alternative funds.
We’ve also looked at factors to consider when selecting a unit trust, such as your investment objectives, risk tolerance, and fees.
Lastly, we discussed where you can buy unit trusts in Singapore, whether it’s through online brokerages, robo advisors, or traditional financial advisors.
That said, everyone’s financial situation is unique, and not every unit trust or investment strategy will suit everyone.
If you’re feeling unsure or confused about which unit trust is right for you, it’s always a good idea to get a second opinion.
You can chat with one of our unbiased financial advisor partners for free.
They’ll help you evaluate your options and make sure you’re on the right path.
Remember, having expert advice can give you the confidence to make informed decisions that align with your financial goals.
