Unit Trusts


What is a unit trust or fund?

If you invest in a unit trust or fund, your money is pooled with money from other investors and invested in a portfolio of assets according to the fund’s stated investment objective and investment approach. A unit trust is a fund which adopts a trust structure; not all funds use a trust structure. In this guide, the term “fund” will also refer to a unit trust.

In Singapore, local and foreign funds offered to retail investors are regulated as collective investment schemes. The unit trust or fund is managed by a fund manager.

Some investment products have been categorised as Specified Investment Products (SIPs). Do check with your financial institution whether the product you are considering is an SIP. For information on the requirements in place when transacting SIPs, please refer to the Consumer Guide on SIPs requirements.

Foreign listed products – risks

Foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection.

Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing. 

What is the return? What is the net asset value (NAV)?

You invest in a fund by buying units in the fund. There is capital gain when the price of the units rises above the price you paid for the fund. Some funds pay dividends.

The price of each unit is based on the fund’s net asset value (NAV) divided by the number of units outstanding. The NAV of a fund is the market value of the fund's net assets (investments, cash and other assets minus expenses, payables and other liabilities). The NAV is usually computed daily to reflect changes in the prices of the investments held by the fund.

Why invest in funds?

Funds invest in a diversified range of assets. A fund’s diversified portfolio means risks can be better spread over the assets in the fund. The poor performance of any one asset in the fund is less likely to have a major adverse impact on your investment as a whole.

Funds also provide access to assets or markets which may be difficult for you to invest in directly. Also, for a smaller amount of money, you can invest in a diversified portfolio of assets which could cost you more to buy if you had to pay for each asset in the fund individually.

There are many funds to choose from. You can select a fund or a combination of funds to cater to your specific investment objectives and risk tolerance. For example, if you are nearing retirement and have a low tolerance for risk, you may consider funds whose objectives are capital preservation and income generation. On the other hand, if you are looking for capital appreciation and are willing to accept higher risks, there are also funds that focus more on growing your capital rather than generating income.

You can invest in funds or unit trusts via the Supplementary Retirement Scheme (SRS) or the Central Provident Fund Investment Scheme (CPFIS). For more information on CPFIS, visit the CPF Board website. For more information on the SRS, you may wish to visit the websites of the Inland Revenue Authority of Singapore and the Ministry of Finance.

What is the maximum amount you can lose?

Funds are not principal or capital-guaranteed. You may lose a substantial amount of the money you invested in certain situations. The risks of investing in the fund are described in the product offering documents such as the prospectus and the product highlights sheet. 

You should also be aware that fees can reduce the returns from your unit trusts. Fees are usually payable, regardless of how well or poorly the fund performs. Even if your fund’s value has been fairly stable, the fees you pay will, over time, reduce the value of your investment.

Are funds suitable for everyone?

Investing in funds may not be for everyone. For example, they may not be suitable for you if you:

  • Want potentially higher returns BUT are not prepared for variable returns which include the risk of losing a substantial part of the money you invested.
  • Do not understand how returns are calculated or are unclear about the factors and scenarios that can affect returns; do not understand a fund’s investment objective, strategy or approach.
  • Do not understand the risks associated with the fund. Some funds use financial derivatives to hedge risks and/or to improve performance. Investors should be aware of the risks associated with the use of financial derivatives, including the risk that the provider (or counterparty) of the financial derivatives defaults.
  • Are not prepared to have your money tied up for long periods of time. As funds are exposed to market ups and downs, investors who stay invested long enough may be better able to ride out the downturns. For this reason, you should have adequate financial resources so that you won’t have to liquidate your funds during a market down turn if you need the money at short notice. If you need to convert your investments to cash in the short-term to meet specific needs, some funds may not be suitable for you.
  • Are not familiar with the fund manager and fund’s track record.

 

What do I watch out for?

Unit trusts have certain features  Do you know … What you should do
A fund is managed by a professional fund manager who decides what assets to buy or sell based on the investment objective of the fund.
As an investor, you have no control over the investment decisions of the fund manager. Assess whether the fund manager has the resources, experience and skills to manage the fund. A fund’s good recent short-term performance may not mean that the performance will be maintained over a longer period. Even with a longer track record, past performance is not necessarily a good indicator of future performance.
Fees charged by professional fund managers will reduce your returns. Find out about the type and amount of fees applicable.
Funds invest in a diversified range of assets to spread its risks. Investing in funds may diversify some risks, but cannot eliminate all risks.
Be prepared for price fluctuations.
After investing, you should regularly monitor the fund’s performance to see if it meets your expectations.
Funds may provide access to assets or markets which may be difficult or expensive for you to invest in directly. You may face risks unique to that particular fund. For example, a fund investing in emerging markets may be subject to political and legal risks, as well as foreign-exchange risk. You should regularly monitor its performance and the economic and political risks of the markets you are invested in.
There are many funds to choose from to cater to your risk tolerance and specific investment objectives (e.g. capital preservation, income generation or capital appreciation) The variety of funds available can be overwhelming. If you invest indiscriminately, you could end up with an assortment of funds that does not match your financial needs. You should be clear about your investment objectives before deciding which funds are suitable for you.

What can cause you to lose money or reduce the returns on your investments?

Some of the risks associated with investing in unit trusts include:

Factor / condition  What happens 
Market risk The Fund’s NAV or trading prices will be affected changes in the value of the investments made by the fund. The funds’ investments may, in turn, be affected by various factors such as changing economic, political or market conditions in the market(s).
Liquidity risk Funds also face liquidity risk. Some funds may be thinly traded. This may affect the prices at which you buy or sell.

This may happen, for example, if there is little interest or research coverage for the fund or the underlying market or investment theme it is exposed to.
Interest rate risk Funds that invest in bonds, debentures or other debt securities will be exposed to interest rate movements.
Foreign currency or foreign exchange risk Funds that invest in assets denominated in foreign currencies may be exposed to adverse currency movements.The fund’s currency base may also be different from your own.
Counterparty risk Funds may be exposed to the risk that the counterparty that they trade with is unable to meet its payment obligations due to a deterioration of the counterparty’s financial situation or otherwise.

You should also be aware that fees charged by the fund manager can reduce the returns from your unit trusts. In particular, management fees are payable regardless of how well or poorly the fund performs. Even if your fund’s value remains stable, the fees you pay will over time reduce the value of your investment.

What are the types of unit trusts or funds available?

What assets do funds invest in?

There are different types of funds available. Each one will have its own investment objective and investment approach or strategy. The investment objective may be capital appreciation or to generate income. The fund manager decides the fund’s investment strategy (to achieve the investment objective) and what assets to buy or sell. In general, funds may be divided into three main categories: shares, bonds, and balanced funds that combine shares and bonds. Aside from shares and bonds, funds can invest in assets or a combination of assets such as:-

  • Financial derivatives
  • Cash or cash-equivalent products
  • Real estate
  • Units in other funds

Funds offered to retail investors are not permitted to invest in physical commodities directly. They may however obtain exposure to commodities by using financial derivatives.

What investment objectives, strategies or approaches do funds have?

Fund managers may set up funds that invest in a specific country or geographical region, e.g. Singapore, Asia, or Asian emerging markets. They may also set up funds to invest in specific sectors, e.g. infrastructure, technology and healthcare. There are also funds which invest according to specific themes such as climate change or ethical investing. The risks associated with a fund strategy are determined by a combination of the underlying assets selected, and the geographical regions, industrial sectors or themes.

Funds with the same investment objective may use different investment strategies to achieve the same goal. You should understand and ensure that the fund manager’s investment style is in line with your own investment objectives.

It is important to choose a fund that meets your own investment objective and risk profile. The diagram below shows the potential risk and return profile of different types of funds:

 

Note that the chart above is for general guidance only. Bond funds which focus on emerging market government bonds or high yield corporate bonds may not necessarily be safer than funds that invest in ‘blue chip’ equities. This is because high yield corporate bonds may expose the fund to significant credit risks.

What are actively- and passively- managed funds?

Funds may also be classified as either passively-managed funds or actively-managed funds. Passively-managed funds usually invest in the component stocks of a benchmark index and do not require the fund manager to spend much time selecting the stocks.

An actively-managed fund aims to outperform a particular benchmark index. Actively-managed funds may attract more fees and charges as the fund manager makes more active investment decisions.

What is the Trust Deed and Role of Trustee?

Local funds are generally structured as unit trusts and constituted by a trust deed. The trust deed is a legal document that sets out the terms and conditions governing the relationship between investors, the fund manager and the trustee. It describes the investment objectives of the fund, and the obligations and responsibilities of the fund manager and trustee.

The trustee is independent of the fund manager and acts as the custodian of the fund’s assets. The trustee ensures that the fund is managed according to the trust deed to minimise the risk of mismanagement by the fund manager.

Evaluating fund performance

There are three main ways of evaluating the performance of your fund:

Total Returns

  • These take into account both the income received and price changes.
  • Information on total returns is available from the fund manager or from the IMAS / LIA FundSingapore.com website.
  • Returns are annualised so you can examine performance from year to year, or over a number of years, and compare performance of one fund with another.
  • Check if returns are provided net of fees and charges.

Compare fund’s performance against its benchmark index

  • Funds’ performance can also be measured against a benchmark index. For example, funds investing in Singapore stocks often benchmark against the Straits Times Index.
  • A fund is said to have outperformed its benchmark index if the return is higher than benchmark. Conversely, if the return is lower than the benchmark index, the fund has underperformed.
  • An actively-managed fund is generally expected, over a reasonable time horizon, to outperform its benchmark index.
  • For passive or index funds, you can compare the fund’s performance against its benchmark index to see how closely the fund replicates the index’s returns.

Performance relative to risk taken

  • The Sharpe ratio measures a fund’s historical risk-adjusted performance.
  • Generally, the higher the Sharpe ratio, the higher the excess return the manager was able to generate per unit of risk taken. In other words, when comparing two funds that are benchmarked against an index, the fund with the higher Sharpe ratio gives more returns for the same level of risk.

What are the fees and charges? What is the Total Expense Ratio (TER)?

There are two broad categories of fees:

Fees and charges payable by you – these represent sales or redemption charges that you pay to subscribe or redeem in a fund.

Subscription fee or initial sales charge (also known as “front-end load”) Redemption fee or realisation charge (also known as the “back-end load”) Switching fee
  • Payable when you buy a fund. 
  • Ranges from 1.5% - 5% of your investment 
  • Funds with an initial sales charge do not usually charge a redemption fee
  • Payable whenever you sell or redeem the fund.
  • Ranges from 1% - 5% of your investment
  • Some funds progressively reduce the redemption fee if you hold your investment over a longer period of time
  • Funds that charge a redemption fee do not usually have an initial sales charge
  • Payable when you switch from one fund to another fund managed by the same fund manager.
  • Typically, about 1% of your investment.

Fees and charges payable by the fund – these are recurring fees that the fund manager, trustee and other parties charge the fund for providing their services and ultimately reduce your return on investment.

Management fee Trustee fee Miscellaneous fees
  • An annual fee charged by the fund manager for managing the fund
  • Usually 0.5% - 2% per annum of the fund’s NAV
  • An annual fee charged by the trustee for providing custodian services for safekeeping the fund’s assets
  • Usually 0.1-0.15% per annum of the fund’s NAV
  • Other fees include fund administration fees and audit fees.

The recurrent fees make up the Total Expense Ratio (TER). The TER is usually between 1.0% and 2.5% of the fund’s NAV. As a rule of thumb, for your fund to grow in value, the returns must be greater than the costs of running the fund. Assess a fund’s TER before deciding whether to invest in it. Use the TER to compare the costs incurred by different funds with the same investment objectives or approach.

Find out the maximum amount that the fund can levy for each charge. Ask for a clear breakdown of all the fees and charges that you expect to pay for your investment. Do note that charges which are not currently levied may still be imposed in the future.

How are funds priced?

Funds are priced either by the “bid and offer pricing” method or the “single pricing” method. You can find details of the pricing method in the prospectus and the product highlights sheet (PHS).

You can get updated valuations of your fund from the daily newspapers and the FundSingapore.com website. Most funds in Singapore allow daily buying and selling of units.

Bid and offer pricing

Bid Price at which investors sell their units
Offer Price at which investors buy units
Spread Difference (spread) between bid and offer prices of fund’s units reflects subscription (sales) and redemption charges (if any)

In the “bid and offer pricing” method, the subscription charge is added to the NAV per unit, while the redemption charge is deducted from the NAV per unit.

Single Pricing

The fund provides a single quote that reflects the NAV per unit. The subscription charges are deducted from the amount invested before the units are allocated. Any redemption charge will be deducted from the redemption proceeds. In the following example, the fund is assumed to have a single pricing structure, and levy both subscription and redemption charges.  

    Bid and offer pricing Single pricing
Scenario  Assumed numbers
  • Subscription charge is added to NAV per unit
  • Redemption charge is deducted from NAV per unit.
  • Subscription charges are deducted from amount invested before units are allocated
  • Redemption charge is deducted from redemption proceeds.
Buying with $1,000 investment (i) Initial 5% subscription charge
(ii) NAV of $1.00 per unit

Offer price per unit
= NAV of $1.00 + initial sales charge of 5%
= $1.05

Number of units bought
= $1,000 $1.05
= 952.38

 

With $1,000, you buy:
952.38 units valued at $952.38

Buy price per unit
= NAV of $1.00 per unit
= $1.00


Number of units bought
= $950 (5% sales charge deducted from $1,000) buy price
= 950

With $1,000, you buy: 950 units valued at $950

Selling when NAV has increased to $1.10 (i) 1% redemption charge at sale
(ii) NAV has increased to $1.10 per unit

Bid price per unit
= NAV of $1.10 - redemption charge of 1%
= $1.089

Sale proceeds
= $1.089 952.38 units
= $1,037.14

If you sell your investment of 952.38 units, you receive $1,037.14
(this is less than the NAV of $1,047.62 ($1.10 X 952.38 units)

Sell price per unit
= NAV of $1.10
= $1.10


Sale proceeds
= $1.10 950 units 99% (Less redemption charge of 1%)
= $1,034.55

If you sell your investment of 950 units, you receive $1,034.55
(this is less than the NAV of $1,045 ($1.10 X 950 units)

What happens if the fund is terminated?

A fund is terminated when the fund manager decides to wind up the fund. This may occur if the fund manager ceases operations or when the fund size has become so small that the manager decides it is not economically viable to continue managing it.

Before terminating a fund, the fund manager should tell you how to redeem your investment or make arrangements for you to transfer your investment to another fund. The fund manager should notify you of the termination no later than one month before the fund is to be terminated. Find out more from the fund’s prospectus or trust deed.

What documents would I receive?

Every fund must be accompanied by a prospectus and product highlights sheet (PHS) when it is offered to you. Ask for these documents and read them carefully to understand the fund’s investment objective, strategy, risks, fees, historical performance and other important information. Ask the fund manager or your financial adviser if you have questions.

Find out more about what is in the prospectus and PHS.

After investing, you can expect to receive the following reports:

Within three months of the fund’s financial year-end 
  • Annual reports
  • Annual accounts
  • Auditor’s report 
Within two months of the fund’s financial half-year end
  • Semi-annual accounts
  • Semi-annual reports

Some fund managers also publish monthly or quarterly updates, or factsheets on their funds. Read these materials to monitor how your fund is performing.

There are other ways to find out how your fund is performing. These include:

  • The financial section of local newspapers
  • Websites of financial advisers and fund managers
  • The Fund Information Service at FundSingapore.com – this provides information about funds and investment-linked life insurance policies available in Singapore

What to look out for in a prospectus and PHS?

Here are some of the key items to read:

Key Item What you should know / how to use this 
Investment objective, focus and approach Do these match your own investment goals?
Risks Do you understand the risks of investing in the fund and can you afford to take them, e.g. how would you cope with losing money?

Funds may comprise shares and / or bonds, and perhaps some financial derivatives. 
Performance While a fund’s past performance is not indicative of its future performance, it is still useful to compare the fund’s performance to its benchmark and other funds with similar investment objectives. Information about the performance of various funds and investment linked products can be found at FundSingapore.com.
Fees and charges Check what you need to pay and compare them with similar funds.
Subscription, redemption and switching of units Procedures for these transactions are described in prospectus. Read these carefully.

What to look out for in a fund report?

When reading a fund report, do watch out for the following terms:

Item Explanation 
Return Shows fund’s return in previous periods. Note that past returns do not guarantee future performance. Your returns would depend on the fund’s actual performance.
Sharpe ratio This is an indicator of the risk-adjusted performance of a fund. The higher the ratio, the better the fund’s returns relative to the amount of risk taken.
Inception date Tells you when the fund was launched.
Latest fund size Funds with larger asset base are likely to have a lower TER or costs per unit invested.
Price information (1-year high / 1-year low) Shows the highest and lowest unit prices in the past one year. Provides an overview of price fluctuations of the fund but should not be used alone to assess how risky a fund is.
Volatility Measure of fluctuation of a fund’s value over a time period. Higher volatility implies higher risk. Make sure you select a fund based on the amount of risk you are willing to bear and can afford to take.

In addition, while the fund’s investment objective may not change, the actual investment approach or strategy deployed may change. Changes in the top ten holdings of the fund (as shown in the fund’s periodic reports) could indicate that the investment approach or strategy has changed. If you notice that the fund’s holdings do not correspond with its stated investment objective, find out why.

Watch out for how the fund performs compared to its benchmarks. Make sure you understand the charts provided, as well as their limitations. For example, if performance appears to be exceptional over certain periods but not other periods, find out why.

How do you invest in funds?

The list of funds authorised by MAS for sale to retail investors is available on the website via OPERA, the electronic repository for public offers of investments. It also includes foreign funds or unit trusts recognised by MAS for offer to retail investors. These are categorised as “recognised funds”.

You can change your mind about your fund purchase within seven calendar days. There will not be any administrative penalty for cancelling your purchase but you may suffer a loss if the fund has fallen in market value after you bought it. If the market value of the fund has risen, you will get a full refund of what you paid for the fund, but you will not be entitled to the gain. In either case, the sales charge will be refunded to you.

Note that the right to cancel is not available if you are making additional investments in a fund that you already own. It also does not apply to investors who purchase recognised funds or funds that are listed on the Singapore Exchange.

What is the sales process?

When recommending a fund, your financial adviser is required to disclose to you the key features of the product including the following:

  • Nature and aim of the product
  • Benefits of the product
  • Risks of the product
  • Details about the fund manager
  • Fees and charges to be borne by you
  • Share of fees and commissions due to the financial adviser
  • Warnings, exclusions and disclaimers

Key questions to ask or considerations before buying a unit trust or fund

Funds differ in terms of investment objectives, strategies, risks and costs. Think about whether you want the fund to provide regular income or for your initial capital to grow. Choose one that matches your investment objectives and risk profile. When choosing a fund, consider the following:

1. Your needs and goals/objectives, personal circumstances and risk profile

2. Find out more about the unit trust you are considering:

  • ensure that the fund’s investment strategies are in line with your own investment objectives
  • ensure you understand all the risks and are comfortable it matches your own risk profile
  • you should be comfortable that the fund manager has the necessary resources, experience and skills to manage your investment. Check that both the firm and the individuals managing the fund have a credible performance track record in managing the fund which you intend to invest in. However, do note that past performance is not necessarily an indication of future performance.

3. Find out about alternative investment products and compare their risk-return profile and features with the product introduced to you.

 

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).