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Admin ---> can you kindly paste this as "sticky" thread. something I will like to contribute
Most of the time there are too many information about UTs (unit trusts_ that sometimes it's hard to dissect & undertstand them, hence we get confused or have certain negative preconceived notion about UTs. Therefore, I thought it will be a good to talk about UTs (unit trusts) since we are facing a severe recession globally & some of the retail investors may be keen to buy up UTs at cheaper value from their fund managers or distributors.
* Take note I am NOT working in any fund houses nor representing any distributors & NOT promoting any funds.
Lets look at the basics first:
what is a unit trust?
A unit trust (also known as a collective investment scheme) is a pool of money managed collectively by a fund manager. You invest in a unit trust by buying units in a trust. Your money will be pooled with that of other investors & invested in a portfolio of assets to achieve the investment objective of the unit trust.
When a unit trust is first launched for sale, the price of each unit is usually fixed. If you invest in an existing unit trust, the price of each unit will be based on the market value of the underlying assets that the unit trust has invested in. The number of units you receive depends on the amount of your investment less the sales charge you will have to pay.
Unit trusts are generally considered medium to long-term investments. You should have the financial resources to stay invested in them for a reaonsable period of time, so as to gain the full benefits. If you need to convert your instruments to cash in short term to meet specific needs, then unit trust not suitable for you.
Factors to consider before investing in unit trust:
1) Risk profile
Your risk profile is determined by how much risk you are willing to bear, depends on your age, financial situation & investment objective
2) Investment objective
Some unit trusts focus on certain asset classes, geographical regions (e.g. if you are bullish about emerging markets) or industry sectors (e.g. you think in future biomedical hubs are growing at fast pace in Europe)
3) Investment strategy
Some fund managers choose companies that offer "good value", others choose companies for their "growth potential". Make sure the fund's investment strategies in line with your objectives
4) Foriegn exchange risks
Unit trusts that invest in foriegn- currency denominated assets while being priced in Singapore dollars will be exposed to foriegn exchange risks. You may be subjected to foreign exchange gains or losses when you invest in such funds
5) Time horizon
Your investment time horizon is the time period that you stay invested until your expected withdrawal. The younger you are, the longer the time. It is a critical factor to determine the type of instruments you want.
6) Fund Manager
As the Fund Manager looking after your unit trust, you should be comfortable that the firm & its staff have the necessary resources, experience & skills to manage your investment
Benefits of investing in a unit trust
1) Professional Management
Professional Fund Managers with expertise & experience in investments. Either actively managed or non-actively managed.
2) More investment opportunities
Fund Manager is able to invest in a wider range of overseas markets you may not have access to. Less hassle. Some assets such as bond require a min. of investment around $100k. By investing in a unit trust, you are pooling money with that of other investors.
3) Diversification
As a unit trust invests in a wider range of assets, you can better spread your risks. That means the poor performance of any one asset in the unit trust is not likely to have a major adverse impact on your investment as a whole
Drawbacks of investing in a unit trust
1) No control over individual investments purchased by the fund
By investing in a unit trust, you give up control over the choice of individual bonds, shares & other assets that go into the fund, as the fund manager make the decisions for you
2) Fees & charges
I will explain more in there:
(a) Initial sales charge (also known as the "front end load") - this fee is charged when you buy a unit trust, typically 1.5%-5% of your investment. Funds with an initial sales charge would usually not charge a redemption fee
(b) Redemption or realisation charge (also known as the "back end load") This fee is usually set at 1% - 5% of your investment and is charged whenever you sell or redeem the fund. Some unit trusts progressively reduce the redemption fee if you hold your investments over a longer period of time. Funds that charge a redemption fee typically will not have an initial sales charge
(c) Switching fee
Some unit trusts allow investors to switch or change to another fund managed by the same fund manager. A switching fee of about 1% will usually be charged. There may also be free switching facilities available - check with your fund manager of FA.
*Note: other fees & charges to be paid by the unit trust
These are fees that the fund manager, trustee & other parties charge to the unit trust. While you do NOT pay these fees out of your own pocket, they are nevertheless paid by the unit trust, which wil REDUCE the return you get on your investment
- Management fee: this is an annual fee charged by the fund manager for the management of the fund. It is typically 0.5-2% per annum of the NAV of the fund. The NAV of the unit trust is the value of the fund's assets less its liabilities
- Trustee fee: This is the annual fee charged by the trustee for the provision of custody services of the fund's assets. It is usually set 0.1%-0.15% per annum of the NAV of the fund
* While reading the prospectus, pay attention to the maximum amount that the unit trust can levy for each charge. Take note that although some unit trusts do not currently levy such charges, they may do so in future. Consult your fund manager or FA for a clear breakdown of fees
3) Risks
Be prepared for market flunctuations in the market price of your unit trust.
What information should my FA disclose when recommending a unit trust?
- Nature & aim of the product
- Benefits of the product
- Risks of the product
- Details about the fund manager
- Fees & charges to be borne by you
- Share of fees & commissions due to the financial advisor
- Warnings, exclusions & disclaimers
What should I look out for in the prospectus of the unit trust?
- Investment objective, focus & approach
Matches your investment goals?
- Risks
Matches your risk profile?
- Performance
While the past performance of a fund is not indicative of its future performance, but it is useful to compare the fund's performance to its benchmark of other funds with similiar investment objectives - to get an estimate
- Fess & charges (see above mentioned explanation)
- Subscriptions, redemptions & switching of units
The procedures of subscribing to the unit trust, redeeming your investment & switching to another unit trust as described in the prospectus. Read them carefully.
For any unit trust approval for offer into the public, MAS regulates them. Check their website.
Distributors of unit trusts would need to hold a financial advisor's licence or be an exempt financial advisor. List of financial advisors regulated by MAS is found under their website/
What happens if I change my mind after I bought a unit trust?
You can change your mind about your unit trust purchase within 7 calender days. There will not be any administrative penalty for cancelling your purchase BUT you may suffer a loss if the unit trust has fallen in market value after you bought it. If the market value of the unit trust has risen, you will get a full refund of what you paid for the unit trust, BUT you will not be entitled to the gain. This is to protect the existing unitholders of the fund. 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 to a unit trust you already own. It also does not apply to investors who purchase recognised funds listed down on the SGX.
Lastly, Caveat Emptor on what I have typed out. Please use this as REFERENCES only, do NOT use them as guides for your investment decisions.
Good Luck! 
This message was edited by cookieguy on 07-Mar-2009 @ 2:52 AM
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