For most Singaporeans, unit trust is the best investment instrument to start with. But why so many people lost money in unit trust investment? Because most people chose the wrong funds. If you want to make money, you need to know how to choose the right unit trust for yourself.


It is unlikely that you are complete strangers to unit trusts. You most probably have listened to the sales pitch of unit trusts from banks, stockbrokers and financial advisers, but you are not sure whether they have your interest at heart.

Then the ETF providers come to whisper next to your ears, “fund managers cannot outperform the market, you should not invest unit trusts, invest ETFs by yourself instead”. This is ironic because ETF providers themselves are fund managers, and they too just want to sell their funds.

So you are confused. How can you dig below the sales pitch and choose the right unit trust to invest? Many readers have benefited from my tips of choosing high dividend stocks in 5 minutes. Today I will give you some simple tips to start looking at unit trust the correct way.

People who say you should not invest in a unit trust is as good as saying a knife has no use. Unit trust or knife is just a tool, it benefits you if you use it correctly, but it turns to a disaster if you use it the wrong way.

People who know little about investing often repeat what they hear, not knowing whether what they heard are correct or even if they are repeating what they heard correctly. – Ivan Guan

Investors cannot be blamed because there are more than 2,000 unit trusts and 100 ETFs registered in Singapore, picking the right one to invest can just be mind-boggling.

I won’t go to the technical part of unit trust but rather the practical aspects today. Let’s understand why unit trusts were disappointing experience for many investors first.

Unit Trust investment starts with a broken promise

To be clear, Unit trust is just an investment structure, it is not an investment strategy itself. Unit Trust, ETF or REITs are all under the trust structure. You give the money to a trustee (often a big financial institution) and the managers (fund house) manage the money for you (a promise) in return for the management fee.


This structure is very common in our daily life.

  1. You walk into a saloon and the hairstylist do your hair so you look nice (a promise) in return for a hair cut fee
  2. You give your car to the workshop and they service the car so you can pass LTA inspection requirement (a promise) in return for a servicing fee.
  3. You bring your children to tuition center so your child can pass the exam (a promise) in return for tuition fee
  4. You invest in REITs and the REITs managers deliver rental income to you (a promise) in return for the management fee.

The problem is that in the fund industry, while the fees are clearly defined, the promise is often not clear.

Investors say, “all I want is to make money.” But Fund managers say, “no no no, that is not what I promised.” That is where the frictions and unhappiness come.

So what do fund managers promise? We will talk about this later.

Is ETF better than Unit Trust?

With less and less trust to active fund managers, investors turn to passive fund managers, the ETFs. The experience is better because passive fund managers told the investors the promise upfront, “I am just mimicking the market performance. Whether you make money or lose money is none of my business.”

This may sound good at the beginning, but hardly make any sense. If I am not wrong, you are investing to make money, not to mimic the market performance right? If your hairstylist tells you, “I am just cutting your hair, and I don’t care whether it looks nice or not”, would you be happy?

ETF is just a similar structure as the unit trust, technically any active fund manager can do the same. So it is not the active fund managers are lousy, but whether the investment strategy is suitable for you.

Moreover, due to the short history of ETF and lack of understanding, investors have no ideas of many pitfalls such as Contango effects and Lending Risks. Sooner or later, you will soon see all the criticisms of ETFs coming along.

You can read my article to debunk the 3 myths of ETF investing here.

Are you better of investing stocks by yourself?

If you choose to invest in stocks yourself, you may be worse off. The managers of the stocks, the management of the company, often give NO promise. Do they charge a fee, of course they do. But because the directors’ fee, the incentives are not fully transparent and quantified as a percentage of your investment, most people have the illusions that they are not paying “fees”. You are and you have no idea what is happening in the company.

Being the next Warren Buffett may sound fabulous but it is a professional job. What he does it is akin to a very professional approach to gambling. As much as we want to invest like Warren Buffett, most of us may not be up to the game.

I hope by now, you understand that no matter you invest in unit trusts, ETFs or stocks, your situation is the same. It is your job, or with help from your financial adviser, to choose the right unit trusts, ETFs or stocks.

If you don’t want to put in any effort, you are better off leaving your money in the bank. If you want to understand more, let’s continue…

What is the Market? Supermarket? Wet market?

Let’s get a fundamental concept right.

Investment “experts” like to use the word “market”. The market goes up, the market goes down. But when they say “fund managers cannot outperform the market”, which market are they referring to? They may not be sure themselves.

A market is commonly represented by an index, constructed by index providers such as MSCI. A stock market index is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average) to describe the market.

But here is the problem, an index has only

  1. A section of the market
  2. Based on selected stocks

Index is just one way of representing the market, not the market itself. – Ivan Guan

Moreover, there are different indices for the same market, even with the same provider. For example, there are 3 commonly used Asian indices by MSCI.

  1. MSCI AC Far East ex Japan
  2. MSCI AC Asia ex Japan
  3. MSCI AC Asia Pacific ex Japan

The chart below shows the differences between the 3 indices.


As you can see, each index has difference exposure to different countries. For example,

  1. Australia has 24% weight in MSCI AC Asia Pacific ex Japan index, but none in the other two indices.
  2. India has nearly 9% weight in MSCI AC Asia ex Japan index, but nearly not seen in the other two indices.

So an Asian market can mean different thing to different investors.

Index movement has little meaning to investors. Successful investors do not compare themselves with market index. – Ivan Guan

Ironically, fund managers are required by regulators to benchmark to one of these indices. If you think about it, these indices were constructed to reflect general market condition, not to achieve any investment objectives, nor did they consider your specific investment goals and risk profiles, how can you achieve your investment goals by indexing?

Worse still, most indices are Capitalization-Weighted Index which is often detrimental to investment performance.

Good fund managers deviate from the benchmark

I have been studying funds for more than a decade. If a “retail” fund manager keeps talking about GDP growth, unemployment rate, you should get worried.

Because a fund manager’s job is to pick stocks, not to predict the market. You don’t need a fund manager to tell you if Greece is going to default or whether China market will continue to climb up. For two obvious reasons.

  1. Most of the market predictions are just wild guesses. Fund managers in general only rely on public information, so whether the US Federal Reserve is going to raise interest rate by 0.5% or 1% is just throwing darts .
  2. If the fund manager does know some “insider” information, they will NOT tell you. They are better off to invest their own money than going to jail for nothing.

What the fund managers can add value is to select the right companies, and their salary livelihood depend on that.

What a good bottom up fund manager will do is to choose stocks regardless of country or sector allocation. As a result, you will see a huge deviation of the country allocation of the fund comparing to their respective benchmarks.

For example, the country allocations of the three bottom-up Asian funds above are very different from the benchmark.

  • Aberdeen Pacific Equity
  • First State Dividend Advantage
  • Schroder Asian Growth
Source: Schroders and Aberdeen (fund factsheet) as at 31 March 2015. First State (fund factsheet) as at 30 April 2015.

In fact, I don’t even bother to compare them with the benchmark, it is just plain meaningless. Bottom-up fund managers should not be constrained to allocate according to their index.

Should you look at performance?

Most fund sales pitches start with past performance. Banks like to sell the flavor of the month, which is usually the top performing fund in the past few months.

Why? Because top performing funds are easiest to sell. But buying the best performing fund is almost always suicidal.

Read the fund disclosure “Past performance does not guarantee future performance”, and believe them. – Ivan Guan

Firstly, Since unit trust is a diversified portfolio, short term out-performance is always driven by the performance of a particular underlying country or sector. It hardly reflects the stock picking skill of the fund manager.

We all know the holy grail of making money in stocks is to buy low and sell high, buying a top performing stock will most probably result buying high and sell low.

Secondly, a top performing fund is sexy and it will attract a lot of investors. With tons of money pouring in at the same time, a good fund manager has nowhere to invest but to hold cash.

This is a time where the fund will be almost certain to “under-perform the market” because cash holding has no return and it will average down the overall return of the fund.

At this point, a good fund manager will do either a soft or hard close of the fund to reject any new investors (Yes, unit trust is not always open for subscription). Unfortunately, A lot of good funds were snapped up by institutional investors and closed for retail investors forever. Watch out for the re-opening of these funds.

Focus on investment objectives

If we tabulate the information of the same three Asian funds, you can see

  1. Aberdeen Pacific Equity & Schroder Asian Growth focus on “long term capital growth”
  2. First State Dividend Advantage focuses on “regular distribution” of dividends


As an investor, I will expect

  1. A capital growth fund such as Aberdeen Pacific Equity or Schroder Asian Growth fund to be more aggressive and volatile (not necessarily risker).
  2. A dividend focused fund such as First State Dividend Advantage fund to invest in matured companies and relatively more defensive in a down trend market.
  3. Capital growth funds do not necessarily outperform dividend focused funds, they just perform in different market cycles.

Seven basic steps of choosing the right unit trusts.

I hope this article has given you some new perspectives on unit trusts.  There are a few steps you should follow before investing your hard earned money:

Step 1. Do not choose a unit trust simply because it just delivered a high return. Higher returns are almost always accompanied by higher risks.

Step 2. Before investing in a unit trust, develop an overall financial plan and be clear about your investment objectives, investment time horizon and risk profile.

Step 3. Do sufficient research to choose the right fund manager. Be comfortable that the fund manager has the resources, expertise and skills to manage the unit trust.

Step 4. Check that you are buying an approved unit trust managed by an authorised fund manager. This information can be found on the MAS website.

Step 5. Read the prospectus carefully as it contains important information about the unit trust.

Step 6. Check what fees and charges you have to pay when buying, selling or switching a unit trust, as these will affect your returns.

Step 7. Monitor your investment regularly. Read the financial statements and annual reports sent to you to check how your unit trust is performing.

Next time, I will talk about some useful indicators to compare unit trusts and pick up the gems. In fact, I have used some indicators in my past blog posts, you may want to check out the applications of “rolling return” and “asset allocation history”.

Picking a good unit trust is both art and science. When was the last time you reviewed your unit trust portfolio? Did you fall into the top performing fund sales pitch before?

If you have any question about how to choose a unit trust, leave your comments below and I will be glad to answer them.

If you want me to help you review your existing unit trust investment portfolio, you can submit a request using the form below.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • Hi. What do you think of this fund JPM Global Income A (Irc) AUD (Hedged) (LU0898699433)? It pays 7% dividend in average. However annualized performance is negative since inception. Would you recommend this fund? Looking forward to your reply. Thanks.

  • Hi Ivan,

    In your article, you mentioned that banks usually push recently best performers and they are usually the worst investment decision.

    How would you view a unit trust that see the NAV in a gradual uptrend over the couple of years with consistent dividends payout? Where is the pitfall here?

    Thank you!

  • Just seeking a quick view. Is it advisable to continue investing in unit trust if you are above 50 or reaching your retirement age?

    • Hi, Kamal

      You should continue investing in unit trust even after your retirement. However, you should shift the investment objective from capital gain to income generation.

      If you have a sizable unit trust portfolio, you should be able to build a consistent retirement income even if you are not working any more.

  • Hi I am new to unit trust. My question is how do we earn returns from unit trust? in the form of dividends or capital appreciation when we redeem it?

    When is a good time to redeem our unit trust? How long should we hold our investment?

  • Hi Ivan,

    Can you advise me on the Fixed Deposit Rate in DBS. On the web site it shows @6.88 for 3 months. Is this still offered.

    Thank you

  • Hi Ivan,

    Thank you for your informative blog. i bought unit trust with UOB – BGF Global mutli-asset income fund 2 years ago. Paper loss now. Banker advising to redeem portion of it to put into 5 year saving plan. What will you advise? Should i just hold on or should i just redeem?

    Thank you.

    • Hi, Lin

      This happens to many people, you buy a fund from the bank, they promised you that this fund is the best performing fund, with years of track record, reputable fund manager and multi-asset strategy, and so on. And they promised you that they will monitor it for you and let you know when you need to change to other funds. (most of these promises will never be realised)

      So there will only be 2 scenarios, the fund either goes up or goes down. Either way, the bank will ask to you to redeem it or change it to another fund or a saving plan. Either way, the bank will earn another round of commission.

      So in the long run, you will always lose, because your chance of making a profit from these products solely depends on luck. If you have 50% chance of getting into the right fund, you will still lose after deducting the commission paid to the bank.

      If you want to know the right way of managing an investment portfolio for yourself. You can find out more here.

      • Hi Ivan,
        Based on your answer to Lin :
        “So in the long run, you will always lose, because your chance of making a profit from these products solely depends on luck. If you have 50% chance of getting into the right fund, you will still lose after deducting the commission paid to the bank.”,

        Your view seems to be that –
        1) purchasing Unit Trust from a bank is not a good way to invest in the long term.
        2) However, a Unit Trust is not necessarily a bad investment tool.

        If we wish to include Unit Trusts in our investment portfolio, does it mean that it is better for us to buy and monitor Unit Trusts by ourselves, rather than buy from a bank?


        • Hi, Sandra,

          You are right that unit trust is an investment vehicle, just like ETF, REITs, options and futures.

          The key thing is to understand under which market conditions a particular unit trust delivers returns; and whether it is the right time for this market.

          So buying a unit trust from a bank is typically a bad idea because the bank is not in a business to monitor the market because they are compensated by the transaction cost. You should buy unit trust from independent advisers whose job are portfolio management.

          Of course, you can monitor it by yourself, but that will take up a lot of time and energy; and it will also take years to gain experiences in this field.

  • Hi Ivan , I’m glad that i came across of your informative article. However i would like to seek your advise on investment plan . I’m a beginner in this whole ball of game. I would like to seek your advise on whether endowment or unit trust should i invest on ? Hope to hear from you . thank you in advance.

    • Hi, Stephanie

      You will get mixed response for this question. If you ask insurance agents, they will say endowment is better. If you ask fund sales people, they will say unit trust is better.

      Each instrument has its pros and cons. Ultimately, it is not whether you should choose endowment, unit trust, etf, stock, reits whatsoever, rather, you probably need to decide on your investment objectives first.

      Once you are clear about why you invest and what results you want to achieve, choosing an investment vehicle will become easier.

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