The nerves of many local investors have been badly rattled of late. The bankruptcy of Lehman Brothers, and the mini bonds saga that followed, gave investors of the Lehman Brothers mini bonds a rude awakening, as they saw their investments reduced to nothing but worthless scraps of paper.
One fundamental rule of investing: Always know what you are buying into. If you know next to nothing about what you are investing in, do not buy into it, no matter how enticing the returns may seem, or how persuasive the personal banker may sound!
In A Nutshell: Advantages & Disadvantages of Unit Trusts
By now, investors should be well-acquainted with the numerous benefits of unit trusts. Diversification, economies of scale, professional management and liquidity are the main benefits of unit trusts. For example, for a minimum sum of S$1,000, an investor can stretch his or her dollar, and be invested in a global, regional, or single country equity fund.
But as with any form of investments, unit trusts have their own set of risk and disadvantages as well.
The returns from your unit trust investments do fluctuate according to market conditions. Thus, there is always the possibility that the value of your investments would depreciate. Unit trusts are professionally managed instruments, but it does come at a cost to investors. Upfront sales charges, annual management fees and expense ratios are costs that investors have to take into account. The management fees and expense ratios vary from fund to fund.
Having run through some of the main advantages and disadvantages of unit trusts, let’s take a closer look at the risk control measures behind them.
Understanding How A Trustee Works
The assets of a fund are taken into custody, and held by a trustee. In accordance with the duties and responsibilities of a trustee of a fund, trustees are required, but not limited to:
- take into custody or control all the property of the fund and hold the property on trust for the participants
- ensure that all the property of the fund is properly accounted for
- keep and maintain a register of the participants of the fund
By holding on to the assets of the fund, the trustee functions as a third-party ‘safety net’ for investors.
However, this safety net is not 100% “fool-proof” either. A trustee can also become insolvent . In the event that the trustee of a fund becomes insolvent , the trustee is not allowed to use the investors’ holdings and monies to offset the trustee’s debts. The fund manager will appoint another approved trustee to take over as the new trustee.
Will I Get My Money Back If The Fund House Winds Up?
Investors need not worry about their investments, in the event a fund house ceases its operations.
The assets of unit trusts are held separately on trust by the trustee for the benefit of the unit holders. In the event that the fund manager goes into liquidation, a meeting will be called by either the manager or the trustee for the purpose of determining an appropriate course of action.
If a resolution is passed at the meeting, the trustee will take the necessary steps to wind up the fund. The trustee then has to ensure that the resultant proceeds have been distributed to participants in the same proportion as their holdings of units.