Understanding unit trusts

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October 29, 2018 | 11 min. read

Understand how unit trusts and funds work and things to look out for before you invest.

Key takeaways

  • When you buy into unit trusts, your investments are handled by a fund manager.
  • The returns on your investment are dependent on many factors, including your risk appetite and the fees charged to the investor and the fund.
  • The list of funds authorised or recognised by MAS for sale to retail investors is available on OPERA.

What is a unit trust?

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.

Unit trusts versus ILPs

Investment-linked insurance policies (ILPs) are another way to invest in funds. The difference between these and unit trusts is that ILPs combine life insurance coverage and investment components. Your premiums are used to pay for units in sub-funds of your choice, and some of the units are then sold to pay for insurance and other charges.

If your main goal is investment, you may wish to consider unit trusts. Sometimes, the ILP sub-fund that you are interested in may also be offered as a unit trust (i.e. without insurance coverage).

See also: Understanding investment-linked insurance policies

How it works

In Singapore, local and foreign funds offered to retail investors are regulated as collective investment schemes. A fund manager manages the unit trust or fund. They are paid a management fee from the fund, typically based on a percentage of the assets they manage.

Note: Some investment products are categorised as Specified Investment Products (SIPs). You will need to be certified to invest in them. Do check with your financial institution whether the product you are considering is an SIP.

Returns from unit trusts

You invest in a fund by buying units in the fund. There is a 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.

See also: Understanding unit trust pricing and fees

What's the most 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.

Fees can also reduce your returns. 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.

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. Find out more about the features of funds below:

Feature This also means... What you should do

Managed by a professional fund manager who decides what assets to buy or sell based on the investment objective of the fund.

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.
Note: A fund’s good recent short-term performance may not mean that it will continue to perform well 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.
Invests in a diversified range of assets to spread its risks. May diversify some risks, but cannot eliminate all risks. Be prepared for price fluctuations. After investing, regularly monitor the fund’s performance to see if it meets your expectations.
May provide access to assets or markets that 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, legal and foreign-exchange risks.
Regularly monitor the fund's performance and the economic and political risks of the markets you are invested in.
Many funds to choose from to cater to your risk tolerance and investment objectives (e.g. capital preservation, income generation or capital appreciation) The variety of funds can be overwhelming. If you invest indiscriminately, you could end up with an assortment of funds that do not match your financial needs. Be clear about your investment objectives before deciding which funds are suitable for you.

 

What are the risks?

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

Market risk

The fund’s NAV or trading prices will be affected by changes in the value of the assets in the fund that in turn are affected by changing economic, political or market conditions.

Liquidity risk

There is no secondary market for funds that are not listed. Hence, you can only redeem your units on the fund’s dealing days.

The secondary market may also be illiquid for funds that are listed and traded on a securities exchange. This may affect the prices at which you buy or sell.

Interest rate risk

Funds that invest in bonds, debentures or other debt securities will be exposed to interest rate movements because the prices of debt securities tend to move in an opposite direction to interest rates. For instance, debt securities prices generally fall when interest rates rise.

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.

Checklist

Are funds suitable for you?

Investing in funds may not be for everyone. Before you invest, make sure that you:

  • Want potentially higher returns BUT are also prepared for variable returns which include the risk of losing a substantial part of your investment
  • Understand how returns are calculated or the factors that can affect returns.
  • Understand the fund’s investment objective, strategy or approach.
  • Are familiar with the fund manager and fund’s track record.
  • Understand the risks associated with the fund.
    • Some funds use financial derivatives for hedging or investment purposes. You 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 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.
    • You should have adequate financial resources so that you won’t have to liquidate your funds during a market downturn. 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.

Types of funds

There are different types of funds available, each with 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.

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

When choosing a fund, consider the following:

What assets it invests in

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
  • Money market instruments
  • Eligible deposits
  • Units in other funds
Investment strategy or approach?

Fund managers may set up funds that invest:

  • In a specific country or geographical region, e.g. Singapore, Asia, or Asian emerging markets
  • In specific sectors, e.g. infrastructure, technology and healthcare
  • 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.

Risk and return profile

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

Higher risk and return Moderate risk and return Lower risk and return
Specialised funds Global equity funds Balanced funds
(mix of bonds, equities and money market instruments)
Bond funds

Money market funds

Note

Bond funds aren't necessarily safer. A bond fund that focuses on emerging market government bonds or high-yield corporate bonds may be riskier than a fund that invest in ‘blue chip’ equities. This is because high-yield corporate bonds may expose the fund to significant credit risks.

Passive or active management

Funds may also be classified as either passively managed or actively managed:

  • A passively managed fund usually invest in the component stocks of a benchmark index and does not require the fund manager to spend much time selecting the stocks.
  • An actively managed fund usually aims to outperform a particular performance benchmark. Actively managed funds may attract more fees and charges as the fund manager makes more active investment decisions.

Investing in a fund

Funds are available from financial institutions and online financial platforms.

You can invest in funds using cash, or via the Supplementary Retirement Scheme (SRS) or the Central Provident Fund Investment Scheme (CPFIS).

What you can invest in

The list of funds authorised or recognised by MAS for sale to retail investors is available on the website via OPERA, the electronic repository for public offers of investments.

Singapore-constituted funds are known as “authorised funds” while foreign funds are known as “recognised funds”.

Note

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 disclaim

If you change your mind: right to cancel

You can change your mind about your fund purchase within 7 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.

The right to cancel is not available if:

  • You are making additional investments in a fund that you already own
  • You purchased a recognised fund or a fund that is listed on the Singapore Exchange

Evaluating a fund's performance

You should monitor your fund regularly to ensure that it continues to meet your objectives. Do read the fund manager's regular fund reports to keep abreast of how your fund is doing.

There are the main ways of evaluating the performance of your fund.

Total returns

Total returns 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. You should also check if returns are provided net of fees and charges.

Comparing 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.

So, 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.

Checklist

Key questions to ask before investing

Funds differ in terms of investment objectives, strategies, risks and costs. Before you invest, consider the following:

Do you know your own investment objectives?

  • Make a list of your needs and goals, personal circumstances and risk profile.
  • What investment objectives are you trying to achieve by adding this fund to your investment portfolio?

Does the fund match your objectives and risk profile?

  • Ensure that the fund’s investment strategies are in line with your own objectives.
  • Make sure you understand the risks and are comfortable that it matches your own risk profile.
  • Ensure that the fund you are investing in fits in with your portfolio’s over risk-return profile and does not concentrate your exposure to certain risks

Are you comfortable with the fund manager?

  • You should be satisfied that the fund manager has the necessary resources, experience and skills to manage your investment.
  • Check their track record. However, note that past performance is not necessarily an indication of future performance.

Do you need financial advice?

 

If you need financial advice to help you decide whether to buy a fund and which fund to buy, please speak to a financial adviser representative.

 

 

However, if you do not need financial advice, you may consider buying the fund through other channels that may cost less, such as platforms offered by banks or online fund platforms.What are the fees and charges you will incur?

Find out what you will be charged, when and why. You can ask some of the following questions:

 

  • What are all the fees relating to this purchase? Is there a fee schedule that lists all of the fees, both one-time and ongoing, that will be charged?

  • Are any of the fees avoidable or negotiable?

  • Can I lower my costs by buying a fund through a different financial institution or online fund platforms?

  • How is my financial adviser being remunerated? What kind of service is expected for the remuneration?

Have you compared it to other products?

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

  • Assess all the fees and charges that you will incur in buying and holding a fund before deciding whether to invest in it. Compare the fees and charges that will be incurred by (i) different funds with the same investment objectives or approach, and (ii) the same fund through different channels.   

Other questions you may have

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.

What happens if a 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.

See also:

Last updated on March 21, 2019