A unit trust is a pooled investment which pools money from like-minded shareholders and invested in a diversified portfolio of equities, bonds and / or cash. The pool of money collected is professionally managed and invested by the appointed Asset Management Company (AMC). Investments are made in accordance with the investment objective of a specific unit trust which is detailed in the prospectus of the specific unit trust.

Benefits of investing in a unit trust include:
• Access - As a pooled investment scheme, it is a means of accessing large ticket investments such as bonds
• Diversification – As a pooled investment, an investor benefits from the larger number of holdings which reduces the risk level of his investment.
• Liquidity – Investment in unit trusts (open-ended) is liquid and investors do not have to worry about being unable to sell their units.
• Economies of scale – Unit trusts can provide the benefit of cheaper access to expensive stocks
• Professional management – Investors can enjoy the professional expertise of fund managers who have more ready access to information and also are dedicated to investing full time.

Yes there are risks involved in investing in unit trusts. Specific risks are dependent on the investments in which the unit trust is invested. Broadly, market risk is commonly associated with equity unit trusts i.e. there is a possibility that the price of the stocks in which the unit trust has invested may decrease. Of course, the price of the stock may also go up, resulting in profits.

Credit risk and interest rate risk are commonly associated with fixed income unit trust. Credit risk refers to the possibility that the company that has issued the bond in which the unit trust has invested may default whilst interest rate risk refers to the possibility that the price of the bond in which the unit trust has invested may go down because of an increase in the interest rates in the economy. Whilst the market risk is inherent, the investment risk can be diversified as investment in a unit trust generally means a access to diversified portfolio. Further, there are many different types of unit trusts available to suit a range of risk profiles, thus allowing you to choose a fund that suits your risk profile.

In an open-ended unit trust, the unit trust issues as many units as the investor wants. Likewise when an investor wishes to redeem, the no. of units in issue will reduce. There is therefore no issue of liquidity from the investor’s perspective. The value of the units is therefore dependent on the value of the unit trust’s holdings but is not dependent on the investors’ demand for units.

A close-ended unit trust is similar to stocks in the way they are traded. A close-ended unit trust offers a fixed number of shares and usually are traded on an exchange. The price therefore is dependent on the unit trust’s investments as well as the investors’ demand for units.

Whether or not a unit trust distributes dividends will depend on what is its stated investment objective. A unit trust which seeks to provide capital growth is less likely to make distributions than a unit trust which seeks to provide income.

Therefore, if income is your primary investment objective, then you should invest in a unit trust with an aligned investment objective.

The major charges associated with investing in unit trusts are:

• Management fee – This is the fee payable to the manager (fund house) managing the unit trust. The management fee is accrued daily and is therefore included in the Net Asset Value of a unit trust.

• Front-end charge (also commonly referred to as sales charge, preliminary charge) –
This is an entry charge payable when an investor invests in a unit trust. The front-end charge is frequently payable to the advisor / bank from which the investor is purchasing the unit trust from and the fee is frequently used to cover distributor costs. Depending on whether the unit trust invested in adopts bid/offer pricing or NAV pricing, the front-end charge is reflected in the former but not in the latter.

• Redemption charge – This is a fee payable when an investor exits from a unit trust. Unit trusts which levy a redemption charge frequently do not levy a sales charge. Redemption charges are however currently not common in unit trusts registered for sale in Singapore.

• Switching fee – This is a charge which may be applied when an investor switches his investment from one unit trust to another. Frequently the switching fee is lower than a the front-end charge and is applicable to funds within a common umbrella structure.

Broadly, the two common pricing conventions adopted by unit trusts are:

• Net Asset Value (NAV) pricing – This is the total value of the assets in the unit trust after deducting all related expenses e.g. management fee. The price quoted is therefore the NAV. The NAV does not take into account front-end charge which is not a fund-related expense.

• Bid/Offer pricing – This is when there are bid and offer prices quotes for the unit trust. The bid price is the price at which an investor sells units at and the offer price is the price at which an investor buys unit at. The bid price is derived by dividing the NAV of the unit trust by the no. of units in issue. The offer price is derived by adding on the bid price, the front-end charge.

The net asset value (NAV) is the market value of the unit trust’s holdings less any related expenses e.g. management fee, trustee fee etc. The NAV is usually calculated at the end of a trading day as follows:

NAV = Market Value of Assets - Liabilities

The NAV per unit is derived as follows:

NAV per unit
- - - - - - - - - - - - - - - - = NAV
Units Outstanding

How much you allocate to various unit trusts will depend on factors like your income, risk aversion and tax status. For professional advice, please speak to your Financial Advisor.

The returns to be expected will depend on the underlying investments of the selected unit trust. It is however important to note that returns cannot be guaranteed and also returns and risk are positively correlated. Hence investors seeking higher returns will need to accept a higher level of risk as well.

In addition, investors need to understand that unit trusts are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run.

A prospectus provides a detailed road map of a unit trust – covering everything from its objective to all relevant fees and charges. It is therefore important for potential investors to read the prospectus. Common items found in a prospectus:

• Fund structure
• Relevant fees and charges
• Investment Objective
• Investment strategy
• Risk factors and description
• Distribution policy, if any