What are Unit Trusts?

A Thorough Comparison & Analysis

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Unit trusts (UTs) aka Mutual Funds are a common investment option among investors, also known as mutual funds. 

Unit trusts bring together a big pool of funds from many segregated investors. A professional fund manager invests this pool of money in stocks, bonds and other classes of assets on behalf of all investors.

There are many advantages that smaller investors can gain from investing in unit trusts, including leveraging a professional fund manager’s knowledge, diversifying their investments, and accessing a broad variety of markets, some of which they may not be able to invest in otherwise.

For investors with only a small amount of funds to invest, these advantages are particularly helpful.

Table of Contents

Is Unit Trusts same as Investment-Linked Policy (ILP)?

The difference between Investment-Linked Policy (ILP) and unit trusts is that ILPs combine life insurance coverage and investment components while Unit Trust is a pure investment instrument. 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.

You may want to consider unit trusts if your primary objective is an investment. Sometimes you may also be offering the ILP sub-fund you are involved in as a unit trust.

One-Stop Financial Unit Trust UTs VS Investment-Linked Policy ILP

What are the differences between Exchange-Traded Funds (ETFs) and Unit Trusts (UTs)?

Before we start, you will need to understand the difference between both types of investment products as this is commonly confused between young investors.

One-Stop Financial Unit Trust UTs VS Exchange-Traded Funds ETFs

Active vs Passive funds

With Unit Trust being the Active Funds and Exchange-Traded Fund (ETF) being the Passive Funds, how are they differ from each?

How does Unit Trusts (UTs) work?

You do not have personal control over the investment portfolio’s individual components. A professional fund manager will bring together a big pool of funds from many segregated investors and invest on behalf of all investors.

It implies that your fund manager takes the pool of funds and purchases shares in a wide range of companies. The other help mitigate the financial loss if one tumbles.

The fund manager is one who manages the unit trust or breaks it. It is their task to purchase and sell property actively in order to attempt to produce greater returns.

You will have to pay for their services. Every year, fund executives can create up to 2% of the complete asset valuation of the portfolio.

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One-Stop Financial Infographic Unit Trusts UT - Why Invest In Unit Trust
One-Stop Financial Infographic Unit Trust UTs - Types of Unit Trust Funds

How to choose Unit Trusts (UTs) fund?

The information below can be found at the prospectus and a product highlight sheet (PHS), that must be accompanied when a fund is provided to you.

Ask for and read these records closely in order to comprehend the investment objective, strategy, risks, fees, past performance and other important information of the fund. If you have any questions, ask the fund manager or your financial advisor.

One-Stop Financial Unit Trust UTs - How To Choose Unit Trust Funds

Evaluating a fund's performance

When evaluating a fund report, do watch out for the following details as well as taking note that past performance of the funds is not a guarantee of future results.

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.

Returns are annualised so you can examine performance from year to year, or over a number of years, and compare the performance of one fund with another. You should also check if returns are provided with a net of fees and charges.

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.

Funds’ performance can also be measured against a benchmark index.

A fund is said to have outperformed its benchmark index if the return is higher than the 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.

How is the Unit Trust (UTs) funds price determined?

Each unit’s cost is based on the Net Asset Value (NAV) of the fund divided by the number of outstanding units.

NAV is the net assets (investments, cash and other assets minus expenditures, payables and other liabilities) of the fund’s market value. The NAV is generally calculated daily to reflect changes in the prices of the fund’s holdings.

The subscription fee is added to the Net Asset Value (NAV) per unit in the “Bid & Offer Pricing” method, while the reimbursement fee is deducted from the NAV per unit.

Here is what the terms mean:

  • 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)

The fund offers single quote per unit that represents the NAV. The subscription fees are deducted before the units are assigned from the amount invested. Any fee for redemption will be deducted from the proceeds of redemption.

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Comparing between "Bid & Offer Pricing" and "Single Pricing" Model

The example below shows how a $1,000 investment is calculated for “Bid & Offer” VS “Single Pricing”:

One-Stop Financial Unit Trust NAV

Unit Trust fees and charges

When we invest in a unit trust, there are three primary types of fees and charges that we incur. Below is an example of the fees charged.

One-Stop Financial Unit Trust Fee & Charges
One-Stop Financial Unit Trust Fee & Charges 2

These are the common upfront fees that we have to pay to get invested in the trust unit, exit fees to divest our investments or charges to switch our investments from one fund to another. Such charges can range from anything less than 1% to as high as 5%.

Most investors are unseen to the second type of fees and charges that we incur, and worse, they are recurrent in nature. Commonly referred to as the Total Expense Ratio (TER).

Trustee remuneration is given to trustee such as banks which takes ownership of your assets and manages them in the best interest.

Other questions you may have...

In general, local funds are organized as unit trusts and formed by a deed of trust. The trust deed is a legal document setting out the terms and conditions of the relationship between investors, fund manager and trustee. It defines the fund’s investment objectives and the fund manager and trustee’s obligations and responsibilities.

The trustee is independent of the fund manager and acts as the guardian of the assets of the fund. The trustee guarantees the fund is managed in conjunction with the trust deed to minimize the fund manager’s risk of mismanagement.

When the fund manager chooses to terminate the unit trust fund, they should inform you how to redeem your investment or arrange to transfer your investment to another fund before terminating a fund. The fund manager should notify you of the termination no earlier than one month prior to the termination of the fund.

This can happen when the fund manager ceases operations or when the fund size has become so relatively small that it is not economically feasible for the manager to continue managing it.

Which are the best-suited Unit Trust (UTs) funds for me?

While our intention to invest is to generate profits, we also need to be intelligent in selecting the correct strategies that make sense to you. Here are some variables to consider before deciding on the investment strategy that works best for you.

1) Know how to identify and analyze – In order to be profitable in investment, you need to know how to identify and analyze unit trusts.

2) Diversification – to manage risk, you should look into what the unit trust funds portfolio are investing. You should go for the unit trust funds according to your desired risk-return profile.

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3) Know your Risk Tolerance – before you start buying unit trust. Different types of unit trust have different risk. Investing in growth funds tends to be much riskier and usually most impacted when a recession hit. In contrast, value funds tends to be less risky (although not always).

4) Personal Interest – may also impact your investment strategies. For instance, if you’re someone who likes to read news linked to technology and enjoy checking out the recent products that can alter our world, then you may be naturally inclined to invest in technology businesses like Apple, Alphabet and Amazon.

Give your assets the chance to grow. With our expertise we will help you to formulate and implement an investment strategy

One-Stop Financial is your experienced expert for asset management and investment advice. Together with our highly qualified partners, we can also offer you a comprehensive range of wealth planning services
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